SINGAPORE (Aug 1): In yet another blow to Singapore’s biggest telco, S&P Global Ratings has cut Singapore Telecommunications’ outlook to “negative”, citing more intense regional competition and increasing cash needs for capital expenditure and dividend payout.

S&P’s downgrade for Singtel comes after Moody’s Investors Service and Fitch Ratings cut their outlook to “negative” in March.

S&P is expecting the company funds from operations to debt – or leverage – to fall below 40% over the next 18 to 24 months as dividends from associates decline.

There is a one-in-three chance that this situation may not improve after 18 to 24 months due to greater-than-expected competitive pressure and capital expenditures, says S&P.

Dividends from associates historically made up 20% to 25% of adjusted EBITDA, with almost 60% coming from Indonesian associate PT Telekomunikasi Selular (Telkomsel). But the Indonesian market has been riled with competition and regulatory changes in the last year – though it recovered slightly this year.

Adding to its financial strain is the $735 million rights subscription by Singtel to its Indian associate Bharti Airtel earlier this year. Airtel is locked in a three-corner fight with Reliance Jio Infocomm and Vodafone Idea. Just days ago, Jio became the largest telco in India, surpassing Airtel and Vodafone, by revenue.

S&P expects dividends from associates to weaken from $1.55 billion this year to $1.2 billion in FY20, and recover to $1.4 billion to $1.5 billion thereafter.

S&P does not expect TPG Telecom in Singapore to impact Singtel in a big way as the latter has lacklustre coverage. However, Singtel can expect muted growth in the local scene amid rising costs.

S&P notes that Singtel dividends will likely remain stable. Singtel said it will keep dividends at 17.5 cents a share in FY20. But the telco is likely to have high capital expenditure in the next few years to support the rollout of 5G fixed wireless access services in Singapore and Australia.

S&P did not factor in potential divestment of digital assets in the medium term in its rating. The firm says it may lower the rating further if Singtel’s fund of operations-to-debt ratio stays close to or below 40% on a sustained basis. But it may also revise the outlook to stable if the ratio sustains above 40%.

In a media statement on Wednesday Singtel says its credit ratings remain “strong”.

“We remain financially disciplined and committed to maintaining our investment-grade credit ratings,” the telco added.

Singtel earlier this year told The Edge Singapore that the worst is likely over for its associates. The company expects gradual recovery in its overseas markets in the long term. Analysts have previously said significant recovery for Singtel’s associates would likely come in two years from now.

Singtel will announce its 1Q results next week. Shares in Singtel hit a one-year high of $3.56 last month, before declining to below $3.40.

As at 12pm, the counter is trading 2 cents higher, or up 0.6%, at $3.35.