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May 15 (The following statement was released by the rating agency)
Fitch Ratings says that Singapore Telecom Limited's (SingTel; A+/Stable) financial results for the year ended March 2014 (FY14) fell short of our expectations as free cash flow (FCF) declined due to flat EBITDA, unfavourable currency movements and higher capex and dividends. The ratings headroom remains low as its funds flow from operations (FFO)-adjusted net leverage of 1.9x remains close to the 2.0x level above which Fitch may consider negative rating action.
Fitch expects SingTel's FY15-FY16 leverage to remain around 1.8x-1.9x as a flat FFO at SGD5.4bn-5.5bn would be just sufficient to cover its capex and dividend commitments. However, leverage could deteriorate if SingTel embarks on acquisitions, including the SGD2bn it has budgeted for investment in its Digital Life segment by FY16.
Fitch forecasts FY15 capex to be around SGD2.3bn, in line with SingTel's guidance, as the company aims to invest about SGD1.4bn in its Australian operations to expand data coverage. We think that dividends are likely to be around the upper range of the company's guidance of 60%-75% of net income. SingTel's FY14 FFO declined by 1% to SGD5.4bn as a 7% fall in revenue was partly offset by cost savings and higher associates' cash dividends (FY14: SGD1.2bn vs FY13: SGD993m). Revenue from its Australian operations declined by 13% due to intense competition, lower handset sales and a reduction in mobile termination rates, which more than offset the 3% revenue growth in Singapore due to tiered data pricing and a growing TV business.
FFO was also affected by unfavourable currency movements - the Australian dollar, Indian rupee and Indonesian rupiah weakened against the Singapore dollar. Revenue and EBITDA would have declined by 1% and increased by 5% respectively had the currencies remained constant.
FY14 FCF declined slightly as a flat FFO was completely consumed by higher working capital requirements in Australia, capex and dividends. FY14 capex increased to SGD2.4bn fromSGD2.2bn in FY13 as it aggressively completed the rollout of its 4G network in Singapore and about 75% of its 4G street coverage in Australia. It distributed dividends of SGD2.7bn, or 74% of its net income, in FY14, similar to the SGD2.5bn, or 70% of its net income, in FY13.
SingTel's 'A+' ratings factor in a one-notch support above its standalone rating to reflect the Republic of Singapore's (AAA/Stable) majority ownership (52% at end-March 2014) through Temasek Holdings Pte Ltd (Temasek). SingTel is Temasek's largest investment, accounting for about 13% of its total investment value.