Bangkok--23 Nov--Fitch Ratings
Fitch Ratings has today upgraded Thailand’s Total Access Communication Public Company Limited’s (DTAC) Long-term foreign currency Issuer Default Rating (IDR) to ‘BBB’ from ‘BBB-’, its Long-term local currency IDR to ‘BBB’ from ‘BBB-’, its National Long-term Rating to ‘AA-(tha)’ from ‘A+(tha)’, its National Short-term Rating to ‘F1+(tha)’ from ‘F1(tha)’, and its senior unsecured debenture ratings to ‘AA-(tha)’ from ‘A+(tha)’. The Outlook is Stable.
The rating upgrades reflect DTAC’s strengthened financial profile. The company’s credit metrics are in a much healthier position compared to three years ago, thanks to aggressive cost cutting, significant 2G capex reduction and a delay in 3G licensing. These factors have provided DTAC with the flexibility to defend and halt its margin erosion and support an increase in investments in the medium term. DTAC turned to a positive net cash position at end-9M10 aided by strong cash flow generation, although Fitch expects the company to revert to a net debt position at end-2010E. This is following the payment of concession fees. Funds from operations (FFO) adjusted net leverage improved to 1.0x at end-2009, and to 0.2x at end-9M10 (end-2008: 1.3x); Fitch expects 0.5x at end-2010E.
Under Fitch’s parent and subsidiary rating linkage methodology, the agency rates DTAC on a bottom-up basis, and assigns a one-notch uplift to reflect the moderate support linkage with its parent, Telenor (‘BBB+’/Stable), which has an economic interest of 65.5% in DTAC and strong board and management control. DTAC’s ratings also reflect its strong market position as Thailand’s second-largest mobile operator.
Credit concerns include additional spending required for 3G including license fees and capex. Although the timeframe for the 3G licence auction remains uncertain, Fitch believes that Thailand’s major mobile operators will eventually migrate to the 3G platform. While a surge in capex could weaken DTAC’s financial leverage, the agency believes that its current low financial leverage should provide sufficient flexibility. Other concerns include uncertainty over regulatory, policy and legal issues including 2G concession conversion, stricter foreign ownership restrictions and the pending review of past concession amendments. Furthermore, price competition in the cellular market could affect margins.
The Stable Outlook reflects Fitch’s expectation that DTAC should continue to generate solid earnings. The agency expects the company to be able to maintain its market share and financial leverage consistent with its current credit metrics, despite potential large spend on 3G over the medium term.
The ratings could be positively affected by a sustainable improvement in non-voice revenues to over 25% of service revenues from 14% in Q310 and/or an increase in scale and revenue market share closer to that of the leading operator, provided DTAC is able to maintain FF0 adjusted net leverage below 1.0x notwithstanding additional spending requirements for 3G. Conversely, the ratings could be negatively affected by unfavorable changes in regulatory structure, weaker linkage between the company and its parent, and higher-than-expected investment spending and/or dividend payouts that lead to a significant deterioration in FFO adjusted net leverage of over 1.5x on a sustained basis.