Bangkok--21 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)'.
The affirmation reflects our expectation that DTAC is likely to be able to maintain its number two position in the market with revenue market share of around 25% in the medium term. This is despite the continued deterioration in its market position because we expect competition in Thai mobile market to soften in 2017. In addition, the company is likely to maintain its FFO-adjusted net leverage below 2.5x in the medium term, which is still commensurate with the current rating.
KEY RATING DRIVERS
Weaker Market Position: Fitch expects DTAC's market position to remain under pressure as it has lost market share in both voice and non-voice services to third-largest operator - True Corporation Public Company Limited's mobile business, TrueMobile - in the past few years. Fitch expects DTAC's service revenue market share to decline to around 25%-26% in 2016 from 28.4% in 2015.
Revenue Decline: Fitch forecasts DTAC's service revenue (excluding inter-connection charges) to drop by a low-single-digit percentage in 2016. Strong growth in data revenue will be largely offset by the drop in voice revenue. In 9M16, DTAC's service revenue dropped by 1.9% to THB48.7bn, from THB49.6bn in 9M15.
Subscriber Migration Risk: We think DTAC will face an increasing pressure to migrate its 2G customers to its 3G licence network over the next two years, before its concession agreement expires in September 2018. The company also needs to secure additional spectrum to support the traffic growth and replace its concession spectrum, while maintaining service quality and avoiding service disruption.
Margin Pressure: DTAC's operating EBITDAR margin is likely to narrow to 30%-32% in 2016, from 33.5% in 2015. Fitch expects the company to maintain high marketing expenditure to defend its market share. The higher costs might offset the benefits from regulatory cost-savings of the licence regime in 2016.
Large Investment; Adequate Headroom: Fitch believes DTAC's weaker operating cash flows and high capex will lead to negative FCF and an increase in net debt and financial leverage in 2016. However, there is enough room in the company's moderate financial leverage to partly absorb the impact of lower earnings and high investment. DTAC's FFO-adjusted net leverage of 1.7x at end-9M16 remained comfortable for its current ratings; Fitch forecasts this to increase to about 2.2x at end-2016.
Ratings Reflect Parent Support: We rate DTAC on a bottom-up basis, using our Parent and Subsidiary Rating Linkage methodology. It receives a one-notch uplift to reflect implied support from its parent, Telenor Norway, which 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.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Service revenue to fall 2%-3% in 2016
- Operating EBITDAR margin to fall to 30%-32% in 2016
- THB20bn capex for network expansion in 2016
- High dividend payout in 2016
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- 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
- unfavourable regulatory changes
- weaker linkage between the company and its parent
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- 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