Singtel may cut dividend for first time in 20 years, says DBS Research

Earlier this year, Standard & Poor, Moody's Investors Service and Fitch Ratings all revised Singtel's outlook to negative.
Earlier this year, Standard & Poor, Moody's Investors Service and Fitch Ratings all revised Singtel's outlook to negative.PHOTO: ST FILE

SINGAPORE - DBS Equity Research says Singtel may cut its "unsustainable" dividend rate to 13 to 15 cents per share for its next fiscal year starting April 2020 (FY2021) in order to maintain its credit rating, in a report out on Thursday (Oct 10).

Singtel has either maintained or raised its dividend every year for the past two decades. For its last financial year ended March 2019, Singtel paid a total dividend of 17.5 cents per share and said that barring unforeseen circumstances, it expects to maintain this rate for its current fiscal year (FY2020).

The telco's dividend policy states that "Singtel is committed to delivering dividends that increase over time with growth in underlying earnings, while maintaining an optimal capital structure and investment grade credit ratings."

Earlier this year, Standard & Poor, Moody's Investors Service and Fitch Ratings all revised Singtel's outlook to negative.

Moody's said in March it may consider downgrading the telco's credit rating if its net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) remained elevated at over two times or if Singtel's core EBITDA margins continue to remain below 30 per cent.

DBS in its report on Thursday said it expects Singtel to report core EBITDA margins of below 30 per cent over the next two years due to pricing pressures in Australia and Singapore's mobile markets and growing contribution of low-margin ICT (information and communications technology) service businesses to the telco's enterprise segment.

Singtel's net debt-to-adjusted EBITDA would also remain at over two times if it maintained its current "unsustainable"dividends levels, it added.

DBS said Singtel might divert from its fixed dividend policy and peg dividend payouts to underlying earnings to relieve burden on its balance sheet.

IHS Markit's senior research analyst Wong Chong Jun, however, said Singtel is unlikely to cut its dividend for FY2021.

"Although keeping the dividends flat might result in a payout ratio that exceeds its current target payout range, we noted that Singtel has a history of increasing its target payout range. Since FY2007, the company has amended its dividend policy thrice," he said.

Singtel's ability to generate strong free cash flow has allowed the company to support its dividends, Mr Wong added.

"At the current payout level of $0.175 per share, dividends will aggregate to $2.86 billion and this is still below the guided free cash flow for FY2020 of $3.6 billion.

"In other words, the company has a wiggle room of $740 million, and free cash flow will need to decline by around 20 per cent in FY2021, before it feels the pressure to cut dividends."

In its report, DBS also trimmed its forecast for Singtel's FY2020 and FY2021 earnings by 5 per cent and 3 per cent respectively, bringing them to 10 per cent and 8 per cent below analysts' consensus.

DBS said the profit contribution from regional associate companies have been critical in driving Singtel's share price, but there is a lack of clarity on Indian associate Bharti Airtel's path to profitability and meager growth from associate Telkomsel, which is losing revenue share in Indonesia.

DBS does expect earnings growth to resume in FY2021 with negatives already mostly priced in.

It expects associate contributions and Singtel's ability to monetise its digital businesses to be key catalysts that will move the stock up or down depending on their performance.

DBS maintained its "hold" on Singtel with a target price of $3.12, down from $3.25 previously, based on a 10 per cent reduction in valuation of Singtel's core operations in Singapore and Australia.

In a bullish scenario where its core business strengthens and associate valuations increase, DBS prices Singtel at $3.65.

In a bear-case scenario, its valuation is $2.55.

Singtel shares were up one cent or 0.3 per cent to $3.15 as at 11.51am.