Fitch Rates Advanced Wireless Network#s Bonds #AA+(tha)#

Stocks and Financial Services Press Releases Tuesday November 7, 2017 11:01
Bangkok--7 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Advanced Wireless Network Company Limited's (AWN, AA+(tha)/Stable) THB9 billion senior unsecured debentures due in 2027 a National Long-Term Rating of 'AA+(tha)'.

Proceeds will be used to refinance maturing debt, fund capex and for investment. The debentures are rated at the same level as AWN's National Long-Term Rating, as they constitute its direct, unsecured, unconditional and unsubordinated obligations.

KEY RATING DRIVERS

Ratings Equalised with Parent: AWN's ratings are equalised with those of its parent, Advanced Info Service Public Company Limited (AIS, BBB+/AA+(tha)/Stable), to reflect the strong links between the two companies, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. AIS fully owns AWN and controls its management and operations. AWN was awarded 2.1GHz and 1.8GHz licences and won the auction for the 900MHz spectrum in May 2016. AWN is of strategic importance to its parent as the operator of AIS's licensed business.

High Investment Requirements: Fitch expects the rating headroom of AIS to remain low in 2017 and 2018 due to high capex and spectrum payments. We forecast negative free cash flow (FCF) for AIS, as cash flow from operations is unlikely to cover capex and dividend payouts. We estimate AIS's FFO adjusted net leverage will stay around 2.0x in 2017 and 2018 (end-1H17: 1.8x).

More Rationalised 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 handset subsidies. AIS and Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable) have been cutting handset subsidies and only offering subsidies on post-paid plans since 1Q17. We expect True Corporation Public Company Limited's mobile unit to decrease handset subsidies for the pre-paid segment in 2H17, after passing DTAC in service-revenue market share in 1Q17.

Earnings to Recover: Fitch expects AIS's operating EBITDAR to improve strongly to around THB72 billion in 2017, from THB63 billion in 2016, led by lower handset subsidy expenses. Marketing expenses as a percentage of AIS's service revenue, including handset subsidies, dropped significantly to 8% in 1H17, from 14% in 2016. AIS's earnings should also benefit from the May 2017 cut in the universal service obligation fee to 2.50% of licence holders' service revenue, from 3.75%. The company's EBITDAR margin improved to 46% in 1H17, from 41% in 2016.

Data Supports Revenue Growth: Fitch expects AIS's service revenue, excluding interconnection charges, to rise by around 5%-6% in 2017, supported by continued growth in mobile-data usage and an expanding fixed-broadband subscriber base. Mobile-service revenue is likely to rise at a more moderate 3%-4%, with strong expansion in non-voice services being partly offset by lower voice revenue. We forecast fixed-broadband revenue to increase significantly to around THB2.5 billion in 2017, from THB860 million in 2016.

Leading Market Position: AIS has maintained its leading market position as Thailand's largest mobile-phone operator by service revenue for the past several years. Fitch expects AIS to maintain its service-revenue market share of around 50% in the medium term (2016: 49%). AIS benefits from economies of scale due to its large subscriber base as well as its strong brand and extensive network coverage.

DERIVATION SUMMARY

AWN's ratings are equalised with those of AIS due to the strong linkages between the two companies. AIS's credit profile is supported by its strong market position as Thailand's largest mobile-phone operator and its conservative financial profile. AIS's ratings are higher than those of its domestic peer, DTAC, due to DTAC's smaller size, weaker market position and lower profit margin. DTAC's ratings incorporate a one-notch uplift from the linkages with its parent, Telenor ASA of Norway, which has strong board and management control of its subsidiary.

AIS's credit profile is comparable with that of the Philippines' largest telecom operator, PLDT Inc. (BBB/AAA(phl)/Stable). Both are the largest telecom operators in their respective markets. PLDT's higher financial leverage is offset by its stronger business profile from diversified telecom services, which include both fixed-line and mobile services.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
  • Mid-single-digit service revenue growth in 2017 and 2018 (2016: 1.6%)
  • Operating EBITDAR margin to improve to 45%-46% in 2017 and 2018 (2016: 41%) due to lower handset subsidies and a reduction in the universal service obligation fee
  • THB40 billion-45 billion a year for network capex in 2017 and 2018 (2016: THB40 billion)
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
-Positive rating action on AIS, provided linkages between AIS and AWN do not weaken
Developments that May, Individually or Collectively, Lead to Negative Rating Action
-Negative rating action on AIS
For the ratings of AIS, Fitch outlined the following sensitivities in its Rating Action Commentary of 16 October 2017.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive FCF and an operating EBITDAR margin above 45%, both on a sustained basis
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-FFO adjusted net leverage rises above 2.0x on a sustained basis or
-Unfavourable regulatory changes
LIQUIDITY

Manageable Liquidity: AWN's liquidity should be manageable, even though the company had high short-term debt at end-1H17. Of total THB22.4 billion in short-term debt at end-1H17, THB15.4 billion is a short-term loan from its parent. We expect part of this loan to be rolled over once it has matured. Fitch believes AWN's cash balance of THB2.9 billion, available committed bank loan of USD19.0 million and undrawn short-term bank facilities of THB19.7 billion at end-1H17 should provide enough liquidity to support THB7.0 billion short-term loans from banks. In addition, AWN's ability to access the local debt market should provide liquidity to support the likely negative FCF in 2017 and 2018.


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