Fitch Affirms DTAC at #BBB/AA(tha)#; Outlook Stable

Stocks and Financial Services Press Releases Monday October 16, 2017 16:31
Bangkok--16 Oct--Fitch Ratings

Fitch Ratings has affirmed Thailand-based telecommunications company Total Access Communication Public Company Limited's (DTAC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB', with Stable Outlook. The agency has also affirmed its National Long-Term Rating at 'AA(tha)' with Stable Outlook, and National Short-Term Rating at 'F1+(tha)'.

KEY RATING DRIVERS

Spectrum Replacement Needed: Fitch believes that DTAC will need more spectrum over the next two years to replace the 35MHz spectrum that is part of the 2G concession expiring in 2018. This is on top of the 2.3GHz spectrum that DTAC will have access to under a partnership with TOT Public Company Limited's (TOT). DTAC is likely to participate in the 1.8 GHz and 850 MHz spectrum auctions, which are likely to take place in 2018, as the company still relies on these frequencies to provide 3G and 4G service. We expect the starting prices of the auctions to be high, likely similar to the final prices in the previous 1.8 GHz and 900 MHz auctions in 2015 and 2016.

Dividend Cut Provides Headroom: The suspension of dividend payment will alleviate financial pressure that may arise in the medium term due to a potentially large spectrum investment in 2018. Fitch expects DTAC's free cash flow to remain positive in 2017 without the dividend payment; its cash flow from operations of around THB26 billion will cover capex of around THB20 billion. FFO-adjusted net leverage is likely to improve to around 1.6x in 2017 from 1.9x in 2016, which should provide a buffer to support spectrum investments in 2018. DTAC's financial leverage is likely to surge in 2018 but should remain below 2.5x.

More Rational Competition: Fitch expects price competition in the Thai telecom sector to stabilise in 2H17 and 2018 as operators shift their focus to profitability rather than market share, and scale down their handset subsidies. Since 1Q17, DTAC and Advanced Info Service Public Company Limited (AIS, BBB+/AA+(tha)/Stable) have been reducing their handset subsidies and offering subsidies only on post-paid plans. We expect True Corporation Public Company Limited's mobile unit (True Mobile) to reduce its handset subsidies for the pre-paid segment in 2H17, after having passed DTAC in service revenue market share in 1Q17.

Earnings Recovery: Fitch expects DTAC's operating EBITDAR to improve to around THB30 billion in 2017 from THB28.6 billion in 2016. This will be mainly supported by the reduction in handset subsidy expenses. Marketing expenses (including handset subsidies) as a percentage of service revenue for DTAC fell to 7% in 1H17 from 12% in 2016. In addition, DTAC's earnings should benefit from the reduction in universal service obligation (USO) fee since May 2017 to 2.5% of service revenue from 3.75%. In 1H17, DTAC's EBITDAR margin improved to 41.1% from 35.1% in 2016.

Market Share to Stabilise: Fitch expects DTAC to maintain its current market position in the medium term, with service revenue market share close to that of True Mobile, the second-largest operator, at around 23%-25%, as we expect the competition in the market to stabilise. Since 1Q17, DTAC's share of service revenue has declined at a much slower pace than in 2016, and the company's service revenue expanded yoy in 2Q17 for the first time since 1Q14.

Ratings Reflect Parent Support: We rate DTAC with a bottom-up approach, using our Parent and Subsidiary Rating Linkage methodology. It receives a one-notch uplift to reflect moderate linkages with its parent, Telenor ASA (Telenor) of Norway. Telenor has strong board and management control. Consequently, any changes in Telenor's ownership or the links between the two would prompt us to reassess the level of support for DTAC from its parent.

DERIVATION SUMMARY

DTAC's ratings reflect its market position as Thailand's third-largest mobile phone operators with revenue market share close to the number two operator True Mobile, and its moderate financial leverage of around 1.5x-2.5x. DTAC is rated lower than AIS, which is larger, and has a stronger market position and wider profit margin.

DTAC's credit profile is comparable to Globe Telecom, Inc. (Globe, BBB-/Stable), the second-largest telecom operator in the Philippines, given their similar revenue size. Although Globe has higher financial leverage than DTAC, Globe's business profile is stronger because its telecom services are more diversified and the more benign competition in the Philippines' duopoly telecom market.

DTAC's ratings incorporate a one-notch uplift to reflect moderate linkages with its parent, Telenor. Telenor has strong board and management control over DTAC.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Stable service revenue in 2017 and low-single-digit growth in 2018
  • Operating EBITDAR margin of 37%-39% in 2017 and 2018 (2016: 35.1%)
  • THB18 billion-20 billion network capex a year in 2017 and 2018 (2016: THB19.0 billion)
  • Payment for the 2.3GHz contract to TOT from 4Q17
  • Acquisition of new spectrum in 2018
  • No dividend payment in 2017
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • An improvement in operating EBITDAR margin to over 40% and FFO-adjusted net leverage below 1.5x, both on a sustained basis
  • Significant increase in market share
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • An increase in FFO-adjusted net leverage above 2.5x on a sustained basis
  • Weakening market position as its service revenue market share continues to decline to below 20% on a sustained basis
  • Failure to acquire new spectrum to replace the spectrum that will expire in 2018
  • Unfavourable regulatory changes
  • Weaker linkage between the company and its parent
LIQUIDITY

Strong Liquidity: Fitch views DTAC's liquidity as strong. Its liquidity is supported by a high cash balance of THB18.3 billion at end-2016, sturdy cash-flow generation, and access to the debt market. It has a minimal THB165 million in debt maturing in the next 12 months.


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