Stiffening competition could stifle Singtel but dividends still secure
When Singtel announced stable full-year results for FY17 and an impressive 42,000 new postpaid subscribers in the first quarter – the highest in the country – it was still not enough to dispel fears of an imminent earnings turbulence. Analysts point to increasing competition in Singapore and Australia as a key culprit, putting pressure on mobile service revenues, although the telco is expected to retain its balance sheet strength and attractive dividends.
In India, Singtel has been worrying about the price-led war that has pummeled Bharti Airtel, in which the former had recently upped its stake and is its single largest shareholder. This year, TPG Telecom’s play to become a major operator in Singapore looks to bring additional headaches for Singtel. Other headwinds like foreign currency fluctuations could also put the telco in a tough spot, but it should respond by focusing on its network coverage expansion and digitalisation initiatives, as well as lowering its debt.
“Management expects to close the coverage gap with Telstra — 98% population coverage — by 2018, which alongside the strong content bundling would put it in a solid position to fend off competition from TPG Telecom (TPG), which would likely compete on price,” says RHB.
“Whilst competition remains intense across all segments, Optus would look to further optimise its cost base via digitalisation initiatives, and to capitalise on group-wide procurement savings,” the firm adds.
Nidhi Dhruv, vice president and senior analyst, and lead analyst for Singtel at Moody’s, expects Singtel to embark on a deleveraging strategy, driven mainly by debt reductions, to bring metrics in line with its rating and in consideration of possibly intensifying competition in the Singapore mobile market.
One bright spot for Singtel is that its dividends should remain the most secure and stable in the industry despite higher-than-expected spectrum cost due to forecasted declines for the other two telcos, says Gregory Yap, analyst at Maybank Kim Eng. He also notes that if TPG is unable to cope with expanding into two new mobile markets simultaneously, then incumbents like Singtel “will get some breathing room.”
Singtel’s recent performance was also good, except for the lower-than-expected performance of Airtel, which was the main drag for the telco. FY17 core net profit is 2% above CIMB’S forecast. The telco also saw strong net adds quarter-on-quarter for its postpaid and prepaid segments.
Other headwinds like foreign currency fluctuations will put Singtel in a bind, but Singtel should respond by focusing on its network coverage expansion and digitalisation initiatives.
Singtel maintained a dividend payout ratio of 73%