Singtel slides despite Moody’s ratings upgrade to ‘stable’

• Singtel’s (SGX: Z74) share price dipped 2% on Thursday (28 January 2021)
• Stocks retreated despite US credit ratings agency Moody’s raising the telco’s outlook back to ‘stable’
• Moody's also affirmed the telco’s (P)A1 rating on backed senior unsecured Euro notes as well as an A1 rating on senior unsecured notes
• This comes nearly two months after another US agency S&P Global had cut Singtel’s rating to ‘negative’
• Trade Singtel, long or short, with an IG account today

Why Singtel’s share price fell 2% on Thursday

Singtel’s share price fell over 2% a day after Moody’s Investors Service revised its ratings outlook to ‘stable’ from ‘negative’ previously.

In the same report dated 27 January 2021, Moody's also affirmed the telco’s (P)A1 rating on the backed senior unsecured Euro medium-term note programme as well as the A1 rating on all the backed senior unsecured notes issued by Singtel Group Treasury Pte. Ltd., under the unconditional and irrevocable guarantee from Singtel.

‘The change in outlook to stable from negative reflects our expectation that reduced shareholder returns and the adoption of scrip dividend will help lower leverage to 2.4x-2.5x over the next two years, from 2.6x for the last twelve months ended September 2020,’ said Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

As at 15:30 SGT on Thursday (28 January 2021), Singtel shares are trading at S$2.36 apiece - down roughly 2.1% from the previous day’s close.

Moody’s not expecting a ‘meaningful improvement’ in Singtel’s earnings

Dhruv added that Singtel's A1 ratings reflect the company's leading market positions and regionally diversified cash flow stream from its stakes in various Asian mobile associates.

‘The rating also recognises the considerable unrealized value of investments that provide the company with significant financial flexibility,’ he further noted.

However, Moody’s does not expect a ‘meaningful improvement’ in Singtel's underlying EBITDA over the next 12-18 months. The agency attributed this ‘revenue pressure’ to the intense competition in Singapore and Australia, which has been exacerbated by the impact of Covid-19 on handset sales, roaming and enterprise revenue.

Furthermore, Singtel's capital expenditure (CapEx) requirements will also remain high in both Singapore and Australia, as it continues to expand its 5G network in both core markets. Moody's expects its CapEx to peak in fiscal 2022.

Nevertheless, after peaking at 2.7x in fiscal 2021, leverage is expected to recover to 2.4x-2.5x over the next two years, thanks to the company’s reduction of its final dividend for fiscal 2020 by 49% and its interim dividend for fiscal 2021 by 25% to S$0.051 per share.

‘Despite its high CapEx requirements, the commitment to lower dividend, if continued sustainably, should lead Singtel to positive free cash flow for fiscal 2021 and fiscal 2022,’ wrote Dhruv.

For now, unless Singtel’s overall profitability improves, any upward pressure on the ratings ‘is unlikely given Singtel's CapEx requirements over the next two to three years’.

On the other hand, ratings could be downgraded if Singtel's operating and financial profile remains weak, such that adjusted gross debt/EBITDA (based on cash dividends being added back to core EBITDA) is in excess of 2.6x, or EBITDA margin remains below 30%.

S&P Global still has Singtel at ‘negative’

Moody’s ratings revision comes nearly two months after another US credit rating agency S&P Global Ratings lowered its credit outlook for the group from ‘stable’ to ‘negative’.

The agency stated in a press release that the group has been ‘hit harder than we expected by the Covid-19 pandemic and weakened economic conditions’. It added that Singtel’s performance was hit with a larger decline than its regional peers.

S&P Global had projected that Singtel’s adjusted EBITDA would decline by 11%-13% in fiscal 2021 and remain below pre-Covid levels in fiscal 2022, with government support schemes expected to ‘taper off’ in the second half of FY2021.

As such, they noted that Singtel’s recovery will be more uncertain than other telcos, stating that ‘a significant improvement in Singtel’s performance depends, to a large extent, on the return of some normalcy in operating conditions’.

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