Fitch Ratings has revised Thailand-based telecommunications company Total Access Communication Public Company Limited's (DTAC) Outlook to Stable from Negative. We have also affirmed its Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB' and its National Long-Term Rating at 'AA(tha)'. Fitch has simultaneously withdrawn Long-Term Foreign- and Local-Currency IDRs of DTAC.
The Outlook revision reflects Fitch's expectations that DTAC's 2020-2021 funds from operations (FFO) net leverage will be 1.8x-1.9x (2019: 1.6x) - below the threshold of 2.3x, above which we would take negative rating action. Fitch expects DTAC's spectrum payments to increase and the company to report negative free cash flow (FCF) in 2020 and 2021, which will constrain the company's ability to deleverage over the period.
The ratings were withdrawn with the following reason: For Commercial Purposes
KEY RATING DRIVERS
Market Position Under Threat: Fitch believes that DTAC could struggle to regain market share in 2H20, as rivals undertake aggressive capex and spectrum investments to extend their leads in network quality. DTAC's 2.3GHz network rollout over the past year has driven network improvements and led to net subscriber additions in 4Q19, but this may be short-lived as the two largest domestic mobile operators, Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable) and True Corporation Public Company Limited, step up investments in their 2.6GHz networks and 5G rollout.
Muted Revenue Growth: DTAC's service revenue is likely to decline modestly by around 2% in 2020 due to the coronavirus-led economic slowdown, although it will still outperform our forecast for Thailand's GDP to shrink by 7.8%. Fitch believes that the telecom sector will be more resilient in a downturn relative to other sectors as it is an essential service.
During 1H20, DTAC's service revenue was flat yoy, but lower by 4% compared with 2H19. Revenue from tourists, which accounts for 1.5%-2% of service revenue, fell sharply due to the plunge in inbound and outbound tourists since February 2020. DTAC's service revenue was also hurt by a slowdown in new subscriber acquisition due to the temporary closure of telecom service shops in late March 2020 as a part of measures to curb the pandemic.
Cost Savings Support Earnings: Fitch expects DTAC's EBITDA to remain stable at THB24 billion-26 billion per annum in 2020 and 2021 (2019: THB25 billion) supported by company's ongoing cost-savings initiatives. During 1H20, EBITDA margin improved to 37% (2019: 34%) as general administrative and marketing costs as a percentage of service revenue dropped to 17% (1H19: 21%). DTAC's EBITDA grew by 1% yoy to THB12.4 billion in 1H20.
Conservative Financial Profile: DTAC's FFO net leverage is likely to rise due to high spectrum payments, but should remain commensurate with its ratings at 1.8x-1.9x in 2020 and 2021 (2019: 1.6x). DTAC's moderate leverage gives it flexibility to make additional investment over the medium term. DTAC is likely to pace 5G investment over the next few years to preserve the balance-sheet strength. It aims to reduce capex (excluding spectrum payments) to THB8 billion-10 billion in 2020 from THB13 billion in 2019, as its network upgrade using 850MHz and 900MHz spectrum are likely to be delayed to 2021 due to signal interference.
Revised Lease Treatment: Fitch's revised Corporate Rating Criteria in March 2020 changed the analytical treatment of leases for the majority of corporate sectors, accounting for them as operating costs instead of capitalising them as debt. This resulted in DTAC gaining some rating headroom, although we tightened the leverage sensitivity ratio - based on unadjusted leverage.
The change followed the introduction of new accounting standards. The difference between DTAC's lease-adjusted and unadjusted FFO net leverage of about 1.2x is significantly larger than that of its telecom peers. Its lease-equivalent debt represented 47% of DTAC's total Fitch-adjusted debt in 2019.
Ratings Reflect Parent Support: We rate DTAC with a bottom-up approach using our Parent and Subsidiary Linkage Rating Criteria. It receives a one-notch uplift to reflect moderate linkages with its parent, Telenor ASA of Norway, which has strong board and management control over DTAC. 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.
ESG - Governance: DTAC has an ESG Relevance Score of 4 for Management Strategy due to the company's lack of investment in spectrum and the delay in network build-out, allowing principal competitors to take market share. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
DERIVATION SUMMARY
DTAC is rated lower than AIS, the largest operator with revenue market share of 46% at end-2Q20 and a wider profit margin. AIS has a stronger financial profile with 2020 forecasted FFO net leverage of 1.0x-1.2x and stronger free cash flow profile than DTAC.
DTAC's 'bbb-' Standalone Credit Profile (SCP) is comparable with that of Globe Telecom, Inc. (BBB-/Stable), the Philippines' second-largest telecom operator, in light of 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.
Compared with peers on the National Rating scale, DTAC's 'aa-(tha)' SCP is stronger than that of Siam Cement Public Company Limited (SCC; A+(tha)/Negative) - the largest cement producer in Thailand. DTAC operates in a more stable telecom business, while SCC operates in the volatile cement and chemical businesses. DTAC also has much lower leverage profile than that of SCC.
Compared with Thai Beverage Public Company Limited (ThaiBev; AA(tha)/Negative), DTAC has a weaker business profile. ThaiBev is Thailand's largest beverage producer with strong market position in spirits and a leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar. ThaiBev's financial profile is also supported by its robust FCF generation given the moderate capex. Therefore, DTAC's 'aa-(tha)' SCP is one notch below ThaiBev's National Long-Term Rating.
DTAC's 'AA(tha)' National Long-Term Rating incorporates a one-notch uplift from its SCP to reflect moderate linkages with its parent, Telenor, in line with notching approach for other national peers.
DTAC is of strategic importance to Telenor as the key operating subsidiary in Asia. DTAC is Telenor's second-largest contributor of revenue (20.2%) and third-largest EBITDA generator (17.5%), just below the Norwegian operations. However, DTAC's operational integration with Telenor is limited as they operate in different countries.
DTAC's moderate linkages with its parent are similar to Global Power Synergy Public Company Limited's (GPSC; A+(tha)/Stable) linkages with parent PTT Public Company Limited (PTT; BBB+/AAA(tha)/Stable). GPSC also receives a one-notch uplift from its SCP. GPSC is of strategic important to PTT as it is the flagship power company of the PTT group and accounts for around 10% of PTT's EBITDA. However, GPSC has limited operational integration with its parent, similar to DTAC.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- 2% revenue drop in 2020, revenue growth of 3% in 2021 (2019: 1.3% decline)
- Operating EBITDA margin of 34%-36% in 2020 and 2021 (2019: 34.3%)
- Cash capex (excluding spectrum payments) of THB12 billion in 2020 and THB14 billion in 2021 (2019: THB17.8 billion)
- 50% dividend payout
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An improvement in FFO net leverage to below 1.3x on a sustained basis
- Significant increase in market share
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Loss of market share such that FFO net leverage increases to above 2.3x for a sustained period
- Unfavourable regulatory changes
- Weaker linkage between the company and its parent
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: Fitch believes DTAC will be able to manage its liquidity in 2020. Liquidity should be supported by its cash balance of THB7.6 billion at end-1H20 and its ability to access debt capital market. In 1H20, DTAC drew down THB14 billion in bank loans to repay THB15 billion of maturing debt. In September 2020, the company issued THB10 billion of new debentures to refinance its debt maturing in 2H20 and finance its investments.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
DTAC has an ESG Relevance Score of 4 for Management Strategy due to the company's lack of investment in spectrum and the delay in network build-out, allowing principal competitors to take market share. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg