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 a Stable Outlook. The agency has also affirmed DTAC's National Long-Term Rating at 'AA(tha)' with a Stable Outlook and National Short-Term Rating at 'F1+(tha)'.
The affirmation reflects our expectation that DTAC should be able to maintain robust profit margins and operating cash flow over the medium term despite a continued deterioration in its market position. We expect DTAC to maintain its FFO adjusted net leverage below 2.5x over the next three years, which is still commensurate with its current ratings. Nevertheless, we may take negative rating action if the company's business risk increases due to greater-than-Fitch-expected deterioration in its market position.
KEY RATING DRIVERS
Robust Cash Flow: Fitch expects DTAC's FFO to deteriorate in 2018 and 2019, but to remain strong between THB27 billion-25 billion per annum (2017: THB29 billion), and for its EBITDA margin to narrow to around 34%-36% (2017: 38%) due to additional payments to TOT Public Company Limited to use the 2.3GHz spectrum and the rental payment of concession equipment to CAT Public Company Limited. The rising costs are likely to offset the benefit of regulatory cost-savings from the licence regime and lower marketing expenses in 2018.
Weakening Market Position: DTAC is facing a major challenge to regain market share and stabilise earnings in the medium term. The company continues to lose market share due to intense price competition and its inferior network coverage, slipping to third position in Thailand's mobile-phone operator market after True Corporation Public Company Limited's mobile unit (True Mobile) passed DTAC in service revenue market share in 1Q17. We expect DTAC's revenue market share to decline to around to 23%-24% in 2018, from 25% in 2017.
Additional Spectrum Needed: Fitch believes DTAC requires more spectrum over the medium term on top of the 2.3GHz it has access to under a partnership with TOT and 1.8GHz it acquired in August 2018. DTAC's spectrum portfolio is weaker than that of competitors due to a lack of a low-frequency band; DTAC has wide spectrum bandwidth, but only in the high-frequency band, including the 1.8GHz, 2.1GHz and 2.3GHz spectrums. These spectrums are suitable for servicing city areas, but we believe DTAC may need low-frequency spectrum band of 900MHz to enhance its network quality in rural areas and slow its falling market share and service revenue.
Conservative Financial Profile: DTAC's financial leverage is likely to stay modest in 2018 and 2019, with FFO adjusted net leverage of around 1.5x-2.0x (2017: 1.4x) on moderate capex and spectrum investment. We believe DTAC's low financial leverage should provide the financial flexibility to support additional investment over the medium term, but may consider negative rating action should FFO adjusted net leverage remain above 2.5x due to spectrum acquisitions for which DTAC pays significantly more than we expect.
Parental Support: We rate DTAC with a bottom-up approach, using our Parent and Subsidiary Rating Linkage methodology. The company receives a one-notch uplift to reflect moderate linkages with its parent, Telenor ASA of Norway. Telenor has strong board and management control of DTAC. Consequently, any changes in Telenor's ownership or the links between the two entities would prompt us to reassess the level of parental support for DTAC.
DERIVATION SUMMARY
DTAC's ratings reflect its market position as Thailand's third-largest operator, with revenue market share of 24% in 1H18 - close to the number-two operator (True Mobile: 28%) - and moderate financial leverage of 1.5x-2.5x. DTAC is rated lower than Advanced Info Service Public Company Limited (BBB+/Stable), which is larger, has a wider profit margin and has a stronger market position, with revenue market share of 49% at end-1H18.
DTAC's standalone credit profile is comparable with that of Globe Telecom, Inc. (BBB-/Stable), the second-largest telecom operator in the Philippines, given their similar revenue size. Globe has higher financial leverage than DTAC, but its business profile is stronger because its telecom services are more diversified and competition in the Philippines' duopoly telecom market is more benign.
DTAC's regional peer, Indian telco Bharti Airtel Limited (BBB-/Stable), has a similar leverage profile, but Bharti has better revenue diversification and a larger size. However, Bharti's ratings are weighed down by intense competition in India.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Low-single-digit revenue drop in 2018 and 2019 (2017: flat revenue)
- Operating EBITDA margin of 34%-36% in 2018 and 2019 (2017: 38%)
- THB18 billion-20 billion network capex a year in 2018 and 2019 (2017: THB20 billion)
- 50% dividend payout
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 for a sustained period
- Weakening market position leading to a deterioration in operating or free cash flow generation
- 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 THB26 billion as at end-2017, sturdy cash-flow generation and access to the debt market. It has a moderate THB2 billion in debt maturing in 2018.