Bangkok--13 May--Fitch Ratings
The 1Q19 results of the two major Thai telecom operators highlight the challenges facing the industry amid a slowing mobile sector, says Fitch Ratings. Domestic telcos are likely to compete aggressively including offering unlimited data packages, putting further pressure on their revenue and delaying earnings recovery.
Fitch believes the third-largest operator, Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable), will be the most affected due to its large exposure to mobile revenues. In contrast, the largest operator Advanced Info Service Public Company Limited's (AIS; BBB+/AA+(tha)/Stable) diversification into fixed broadband services should reduce the risk of slower growth in the mobile segment.
DTAC's service revenue declined 5.7% yoy in 1Q19 (2018: -2.8%), but EBITDA contraction was steeper at 26.3% yoy, as aggressive marketing promotions took a toll on profitability. Meanwhile, AIS's EBITDA was flat yoy, despite revenue rising 2.5% (2018: 3.8%), with its fast-growing fixed-broadband services offsetting a flagging mobile business.
Thai telecom operators are likely to continue to face pressure on mobile-service revenues, beset by slowing growth in data revenue. The growth in data subscriptions has started to decelerate in the past few quarters on higher 4G device penetration. In addition, the growth in data usage for existing subscribers is not translating fully into higher revenue, given the fierce competition in data tariff offerings. Data revenues are not growing sufficiently to offset the decline in legacy voice and SMS services, resulting in a drop in overall service revenue over the next two years. Operators may need to cut tariffs further or deepen handset subsidies to accelerate the data service adoption in the lower-tier segment. The number of 4G device users in Thailand has already been high, accounting for 69% of DTAC's subscriber base and 63% for AIS in 1Q19.
However, operators will need to monetise data better to achieve revenue growth in the longer term when data penetration approaches saturation. This will require the ability to adjust data pricing to move away from unlimited and large data allowance packages to a strategy that charges subscribers according to their usage. Service bundling, such as quadruple play, should also help increase customer stickiness and support average revenue per user. However, this may be challenging in a highly competitive market.
Fitch expects DTAC's market position to strengthen in 2019 after acquiring 1.8GHz and 900MHz spectrums. This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years. Nevertheless, meaningful network improvements and brand rebuilding may take effect only after a few more quarters, suggesting EBITDA recovery will probably take place only in 2020. The slow recovery will not immediately affect the company's ratings as its financial leverage remained below Fitch's negative rating guideline of 2.5x at 2.2x at end-1Q19.
AIS should continue to benefit from its strategy to diversify its telecoms business into fixed broadband. Its fixed-line broadband has shown greater stability and growth prospects than mobile over the past few years. We expect the continued growth in overall service revenues, the visibility of operating cash flows and the more moderate capex to allow the company to manage leverage at a level that is commensurate with the current ratings in the medium term. AIS's free cash flow is likely to turn positive in 2019 due to lower spectrum payments and falling capex following the completion of the massive build-out of its 3G/4G networks. This should result in a reduction of FFO adjusted net leverage to around 1.5x-1.6x in 2019, from 1.7x in 2018, giving AIS more rating headroom and financial flexibility to support an increase in marketing expense.