Fitch Ratings is ascribing a “stable” outlook for Singapore Telecommunications (Singtel) with an "A" Issuer Default Ratings (IDR) due to the low rating headroom.

In a Mar 10 special report, lead analyst Janice Chong says, “We expect Singtel to operate over the next two years with funds from operations (FFO) net leverage of 2.4-2.5 times, which is commensurate with its rating. The pace of Singtel's organic deleveraging amid a challenging environment will depend on capital preservation, including shareholder returns.”

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Singtel cut dividends in the past year to manage its leverage in view of the weak operating performance and high capex. As such, Chong has forecasted dividend payments to reduce to $1.3 billion in FY2021 ending March, from $2.9 billion in FY2020, and expect a dividend payout of 85%-90% of net profit from FY2022.

Meanwhile, Chong also believes that s Singtel’s 5G priorities will drive capex over the next three years, as its 5G rollout in Singapore is bound by regulatory requirements to reach 50% islandwide coverage by end-2022. 5G expansion in Australia however, is likely to be business-driven, but a growing focus on mobile services could keep capex elevated.

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Capax to revenue ratio for FY2021 is expected to come up to 17-20%, compared to 14% in FY2020, including $376 million in spectrum fees for the 700MHz spectrum when it becomes available to Singapore telcos. Annual capex may peak at $2.8 billion-3.1 billion in FY2022-FY2023, as Singapore’s 3.5GHz spectrum is freed up for commercial use in 2021.

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On the back of ongoing travel restrictions, Chong is expecting EBITDA to see a slow recovery as roaming revenues remain affected. Fitch expects Singtel’s EBITDA to decline by mid-to-high teens in FY2021. Near-term EBITDA recovery is likely to stem from the revival of enterprise revenue and the group's cost-saving initiatives.

As at 11.55am, shares in Singtel are trading at $2.35.