Singtel may trim dividend for 1st time in 20 years: DBS Research

Cut to unsustainable rate next fiscal year could help telco's credit rating, it says

Singtel has either maintained or raised its dividend every year for the past two decades. It paid a total dividend of 17.5 cents a share in the financial year ended March and noted that it expects to maintain this rate for the current year, barring u
Singtel has either maintained or raised its dividend every year for the past two decades. It paid a total dividend of 17.5 cents a share in the financial year ended March and noted that it expects to maintain this rate for the current year, barring unforeseen circumstances. ST FILE PHOTO

Singtel may cut its "unsustainable" dividend rate to between 13 and 15 cents a share in the next financial year in order to maintain its credit rating, said DBS Equity Research yesterday.

The telco has either maintained or raised its dividend every year for the past two decades.

It paid a total dividend of 17.5 cents a share in the financial year ended March, noting that it expects to maintain this rate for the current year, barring unforeseen circumstances.

Singtel's dividend policy states that it "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's, Moody's Investors Service and Fitch Ratings all revised Singtel's outlook to negative.

DBS said yesterday that it expects Singtel to report core Ebitda (earnings before interest, tax, depreciation and amortisation) margins of below 30 per cent over the next two years.

It cited pricing pressures in the Australian and Singapore mobile markets, and the growing contribution of low-margin information and communications tech 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" dividend levels, DBS added.

It said Singtel might divert from fixed dividends and peg payouts to underlying earnings to relieve burdens on its balance sheet.

IHS Markit senior research analyst Wong Chong Jun said Singtel is unlikely to cut its dividend next year, noting that its ability to generate strong free cash flow has allowed it to support its payouts.

"At the current payout level of 17.5 cents per share, dividends will aggregate to $2.86 billion, and this is still below the guided free cash flow for (the next financial year) of $3.6 billion," he added.

"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... before it feels the pressure to cut dividends."

DBS also trimmed its forecast for Singtel's earnings for next year by 5 per cent and, for 2021, by 3 per cent.

It said the profit contribution from regional associate companies has 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 meagre growth from Telkomsel, which is losing revenue share in Indonesia.

It 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.

If its core business strengthens and associate valuations increase, DBS prices Singtel at $3.65.

Singtel shares closed up 0.3 per cent at $3.15 yesterday.

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A version of this article appeared in the print edition of The Straits Times on October 11, 2019, with the headline Singtel may trim dividend for 1st time in 20 years: DBS Research. Subscribe