Bangkok--27 Oct--Fitch Ratings
Fitch Ratings has revised Total Access Communication Public Company Limited’s (DTAC) Outlook to Positive from Stable. The agency has also affirmed DTAC’s Long-Term Foreign Currency Issuer Default Rating (IDR) and Long-Term Local Currency IDR at ‘BBB’, National Long-Term Rating at ‘AA(tha)’ and National Short-Term Rating at ‘F1+(tha)’.
The Positive Outlook reflects Fitch’s expectation that, despite slow revenue growth and heavy investment for 3G network expansion over the next three years, DTAC’s financial leverage will stay below 1.5x because of strong earnings growth driven by regulatory cost savings under the 3G licensing framework compared to the 2G concession framework. Our previous expectation was that financial leverage would be sustained above 1.5x in the medium term.
Fitch expects DTAC’s operating EBITDAR margin to rise by 3pp-5pp a year during 2015-2017. The Positive Outlook indicates that an upgrade of DTAC’s ratings could occur over the next 24 months if DTAC’s earnings and operating cash flow continue to improve strongly as expected, while maintaining its FFO-adjusted net leverage below 1.5x on a sustained basis.
Key Rating Drivers
Strong Operational Cash Flow: Fitch expects DTAC’s earnings and cash flow to increase in 2014 and 2015 despite slower revenue growth. Earnings improvement will be largely supported by an increase in operating EBITDAR margin. Although marketing costs will remain high during 2014 and 2015, this should be largely offset by the cost savings that stem from changes in the regulatory framework following the issuance of 3G licences. As a result, Fitch expects DTAC’s operating EBITDAR margin to improve to 36%-41% in 2014 and 2015 from 33% in 2013. Its funds flow from operations (FFO) is likely to improve to over THB35bn in 2016 from THB28bn in 2013.
Large Investment; Adequate Headroom: Sustained high capex and potential spectrum investment will lead to negative free cash flow (FCF), and an increase in net debt and financial leverage during 2014 and 2015. However, its solid cash flow from operations and large rating headroom should help the company to absorb the high investment. DTAC’s FFO-adjusted net leverage was healthy at 1.0x at end-9M14 (Fitch forecasts 1.45x at end-2014).
Revenue Growth to Slow: DTAC’s revenue growth is likely to slow to a flat to mid-single-digit rate in 2014 and 2015. Strong growth in data revenue will be largely offset by the drop in voice revenue due to the intense price competition in a saturated market.
Strong Market Position: DTAC has a strong market position as Thailand’s second-largest mobile phone operator, with around 30% of the market by service revenue. The company has continued to expand its network capacity to support strong growth in non-voice services and defend its market share in the face of intense competition in the past few years.
Parent Support: Fitch rates DTAC on a bottom-up basis under the agency’s parent and subsidiary rating linkage methodology. DTAC receives a one-notch uplift to reflect implied support from its parent, Telenor of Norway, which has strong board and management control. Consequently, any changes in Telenor’s ownership or support linkage of DTAC would result in a reassessment of the level of support from its parent.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to revision of the Outlook to Stable at the current rating level include:
- an increase in FFO-adjusted net leverage above 1.5x on a sustained basis
- operating EBITDAR margin remaining below 40% on a sustained basis
Future developments that may, individually or collectively, lead to downgrade of rating include:
- unfavourable regulatory changes
- a weaker linkage between the company and its parent
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- a strong improvement in operating EBITDAR margin to over 40%, while maintaining FFO-adjusted net leverage below 1.5x, both on a sustained basis