TRIS Rating Co., Ltd. has affirmed the company rating and the senior debentures ratings of Advanced Info Service PLC (ADVANC) at “AA” with “stable” outlook. The ratings are based on ADVANC’s leading market position in the Thai cellular market, its extensive subscriber base, and strong brand equity. The ratings also take into consideration the company’s capable and professional management team as well as strong financial profile and cash generating capability. However, these strengths are partially constrained by competitive market environment and uncertainties related to telecom regulations.
The “stable” outlook is based on the expectation that ADVANC will sustain its strong operating performance and liquidity position in the medium term. The company is expected to maintain its revenue market share at about 50%. To maintain the ratings, the company is required to show a strong commitment to balance shareholder returns with creditor interests.
TRIS Rating reported that ADVANC’s business profile is very strong. The company holds approximately half of the industry’s market shares in terms of subscribers and revenues. By year end 2010, ADVANC had 31.2 million subscribers and generated a total revenue of Bt111,280 million. The company’s business profile is supported by a good track record of its management team in handling challenges from dynamic competitive landscape and technological advances. A combination of experienced and capable management team and adequate funding sources has also enabled the company to provide high quality services through an extensive network infrastructure, particularly in rural areas, and control its costs effectively. Significant subscriber base underscores strong brand equity and effective business strategies.
ADVANC’s strong financial profile is underpinned by stable profit margins and strong cash flow generation. Operating margins for the past three years ranged between 42%-47%. The strong margins are enabled by economies of scale and effective cost control initiatives. The company’s aggressive dividend payout in 2010 materially reduced its equity base, which has already declined consecutively since 2006, and significantly weakened its capital structure. At the end of 2010, ADVANC’s debt to capitalization ratio stood at 46.9%. The ratio had risen steadily from 24.2% in 2005. ADVANC’s dividend policy is to pay dividends at least 100% of its net profits. The company; however, stated it is willing to balance the payout ratio with cash preservations to support future investments.
TRIS Rating said about ADVANC’s current financial profile that it fully provides the company with a sufficient financial flexibility should the third-generation (3G) license auction happen in the next few years. The company’s robust cash flows still place it in a better position than industry peers to finance the 3G network rollout. Nonetheless, TRIS Rating cautions that the ratings could be under pressure if the funding requirements for 3G rollout or other business purposes lead to a higher-than-expected leverage financing and weakened the company’s balance sheet further.
TRIS Rating expects ADVANC to pursue a more cautious financial policy should the 3G license auction continue to delay and uncertainties in regulatory environments continue to persist. Under such a scenario, ADVANC should demonstrate a stronger level of financial cushion over times to weather
against unexpected shifts in cost structure or regulatory evolutions in order for the company to maintain the current rating category. The minimum requirement suggests a ratio of funds from operations (FFO) to total debt above 100% and a ratio of debt to capitalization below 50%. -- End