The leverage of Singtel is set to increase to 2.3x-2.5x in FY19.
The plan by the government for a standalone 5G network architecture will bring pain for the city's telcos as the move is expected to drive up capex in 2020-2021, according to Fitch Ratings.
"Standalone 5G networks are costly, as the technology requires an entirely new core infrastructure," according to Fitch Ratings, adding that early adopters like South Korea have been deploying 5G based on non-standalone specifications, which support migration to 5G on existing 4G networks.
The Infocomm Media Development Authority (IMDA) is seeking external views on a proposed regulatory framework and policies for a planned 5G network rollout from 2020. However, only 50% coverage is required by 2023, within 24 months of the commencement of the 3.5GHz spectrum right as the 3.5GHz spectrum band is currently used for satellite communications and is likely to be freed up in 2021.
Although incumbent telcos like Singtel are well-placed to capture the 5G spectrum, leverage headroom will be limited at its current rating amidst an expected capex bump in FY20.
"We forecast an increase in leverage - measured as FFO adjusted net leverage - to 2.3x-2.5x in the financial year ended March 2019 (FY19) and FY20 (FY18: 2.0x), above 2.0x, the threshold at which Fitch will consider negative rating action," Janice Chong, director at Fitch Ratings Singapore said in a report.
The telco is unlikely to post meaningful earnings growth over the next 12-18 months amidst heightened competition in its core markets of Australia and Singapore, according to an earlier report from Moody's Investors Service which expects the firm to explore alternative funding options like asset sales, listings and equity raising to strengthen its weakening capital structure.
Unlike Singtel, the adjusted FFO adjusted net leverage of South Korean telco KT Corporation, which is also gearing for 5G rollout, is tipped to stay healthy at around 1.2x over the rating horizon, providing sufficient financial buffer to implement an upgrade of its networks to 5G technology without hurting its financial leverage.
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