S&P Global Ratings has revised its outlook on Singapore Telecommunications (Singtel) on Dec 7 as it feels the group has been “hit harder” than expected by the Covid-19 pandemic and weakened economic conditions.

“In our view, a significant improvement in Singtel’s performance depends, to a large extent, on the return of some normalcy in operating conditions,” it says in a Dec 7 report released via SGX on Dec 8.

That said, a recovery in the group’s operating performance could take longer than expected, resulting in “protracted weakness in financial ratios over the next 18-24 months,” it adds.

To this end, S&P Global projects Singtel’s adjusted EBITDA to decline by 11%-13% in FY2021 and remain below pre-Covid levels in FY2022 as pandemic-related government support schemes will taper off in 2HFY2021, while “conditions that have dampened Singtel’s performance persist”.

The agency has also noted that risks remain in Singtel’s operating performance given “pressures on various fronts”.

Singtel’s performance was hit with a larger decline compared to its peers in the region due to its presence in Singapore and Australia, which are mature markets.

“Less mature markets have a naturally higher growth potential, which could offset a hit from the pandemic,” it says.

The fall in tourism and the economic weakness following the pandemic have also translated into a fall in Singtel’s prepaid and high-margin roaming revenues in Singapore and Australia.

According to the ratings agency, Singtel’s weak performance is also attributable to a structural decline in its business, including strong competition within its key markets of Singapore and Australia. Furthermore, earnings in Australia’s subsidiary Optus have been impacted by the implementation of the National Broadband Network (NBN) in Australia.

Given the various points, the ratings agency says it believes Singtel’s performance will see a more uncertain recovery compared to other telecom operators.

“We also do not anticipate significant payback from Singtel’s 5G investments in the next two years, with 5G applications still in varying degrees of development,” it says.

“A protracted weakening of performance could indicate a fundamental erosion of the company’s business strength, in our view,” it adds.

On this, the agency says it expects Singtel’s cash dividends will be largely flat in FY2021 and FY2022 at $1.4 billion.

The telco operator also lowered its interim dividend in November 2020 and applied the scrip dividend scheme to that. As a result, S&P Global says it expects cash outflows from dividends to be reduced by more than half to $1.3 billion in FY2021 from $2.86 billion in FY2020.

It also forecasts Singtel’s debt-to-EBITDA ratio to weaken to 2.6x-2.7x in FY2021 from 2.3x in FY2020.

“Nonetheless, we believe the Singtel management has shown a commitment to repair its leverage. The steep deviation from a long record of sticky and high dividends signals the company’s intention to actively manage its discretionary cash outflow and weak operating conditions.”

As at 9.33am, shares in Singtel are trading 1 cent higher or 0.4% up at $2.42.

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