Spectrum cost, dividends drying up cash flows for SE Asian telcos: Moody's

High capital spending, including on spectrum, and expenditure on dividends had resulted in neutral or negative free cash flow for telecom companies in Southeast Asia, ratings agency Moody’s said in a report on Wednesday.

The agency expects these trends to continue through at least 2021, and does not see telecom companies generating enough cash to pay down debt and reduce elevated leverage.

Moody’s also said that the regulatory framework in countries where mobile companies paid higher dividends — Singapore, Malaysia and Indonesia — were generally stable and predictable. But regulations in the countries where the companies paid a higher price at spectrum auctions — India, Thailand, Bangladesh and Pakistan — were less predictable and often politicised.

“The high prices that telcos in this region pay during spectrum auctions regularly make headlines, but the recurring dividends that they do pay governments tend to get less attention. Yet, our analysis finds that in some countries dividends account for a greater share of revenue,” said Moody's Vice-President and Senior Analyst Nidhi Dhruv.

While spectrum payments at government-run auctions are higher in absolute terms, dividends account for a larger percentage of aggregate revenue for telcos on a relative basis in several countries.

“Government-owned incumbent telcos in Singapore, Malaysia and Indonesia pay the highest dividends to their respective governments, while privately owned telcos in India, Thailand and Bangladesh pay more at spectrum auctions,” Dhruv said.

There is an inverse relationship between spectrum payments and dividends paid to government. Telecom firms that pay a large portion of their revenue in dividends — in Malaysia and Singapore — tend to pay a small portion for spectrum. And telcos paying negligible dividends — in India and Thailand — pay a large portion of revenue for spectrum.

Telcos in Malaysia and Singapore have paid around 20 per cent of their revenue to the government, twice as much as the 7-10 per cent for telcos in Pakistan and India. Only a small amount of this gap could be attributed to the smoothing of spectrum payments, as governments allow a longer time horizon for payments.

In India, Thailand and Bangladesh, steep prices are paid for spectrum. Spectrum auctions in these countries, where telcos are privately owned, tend to be more expensive than in other countries. 

But the terms are favourable for telcos, with payments spread over a number of years. The leading telcos in India pay the largest share of their aggregate revenue for spectrum (7.6 per cent), followed by Thailand (7.3 per cent) and Bangladesh (7.0 per cent).

Singapore, Malaysia and Indonesia have more government-owned incumbent telcos than other countries. These telcos have the highest dividend payout ratios in the region. Over the past 10 years, the leading telcos in these three countries have paid more in dividends to their respective governments than what their private-sector counterparts in other countries have paid for spectrum, as reflected by total payments to the government as a percentage of telcos' aggregate revenue. As a result, they have also paid the highest percentage of their aggregate revenue to their respective governments.

Moody's report covers 20 telcos across seven South and Southeast Asian countries, and includes up to three of the largest operators in each country.