TRIS Rating Assigns “AA-” Ratings to Senior Debts Worth Up to Bt5,000 Million and Bt2,000 Million (DTAC148A) of “DTAC”, with Outlook Affirmed at “Stable”

TRIS Rating has assigned the ratings of “AA-” to the proposed issue of up to Bt5,000 million in senior debentures of Total Access Communication PLC (DTAC) and its senior debentures worth Bt2,000 million (DTAC148A). At the same time, TRIS Rating has affirmed the company rating of DTAC at “AA-”. The outlook remains “stable”. The proceeds from the new debentures will be used for investment and as working capital. The ratings reflect DTAC’s strong market position as the second-largest cellular phone service provider in Thailand in terms of revenue and number of subscribers. The ratings also take into consideration the company’s extensive network coverage, its established brand equity, and its proficient management team. These strengths are partially constrained by a competitive market environment and uncertainties surrounding telecom regulations. The “stable” outlook is based on the expectation that DTAC will continue to maintain its strong market position and solid operating performance. TRIS Rating also expects DTAC to maintain a sufficient financial cushion throughout the investment period.

DTAC holds a strong market position as the second-largest cellular phone service provider in Thailand, with about 30% share of subscribers. At the end of March 2013, DTAC had a total of 26.6 million subscribers and generated revenue of Bt23,905 million for the first three months of 2013. DTAC’s business strength is further supported by its established brand equity and an extensive network, both of which enhance its competitive position. The company also benefits from the managerial assistance of Telenor ASA (Telenor), a leading Norwegian telecommunication company. As of May 2013, Telenor held a 42.6% stake in DTAC.

DTAC’s service revenues, excluding the Interconnection Charge (IC), grew by 6%-8% per annum during the last three years, and 12% year-on-year (y-o-y) for the first three months of 2013. The rise was driven mainly by the strong growth of revenue in the data services. The new third-generation (3G) platform, robust prospects for data usage, plus the popularity of smart phones and social networking applications, are expected to continue boost demand for data services. Operating margins as a percentage of sales were dropped from 34.3% in 2011 to 29% for the first three months of 2013. The drop was due mainly to an increase in revenue sharing costs and thinner margin of handset sales. In the medium term, competition in the 3G services will push Thai mobile phone service providers to spend more on promotional campaigns and marketing activities.

DTAC’s financial strength is underpinned by its strong cash flow and ample liquidity. Funds from operations (FFO) were in a range of Bt21,500-Bt22,500 million per annum during the last three years, and reached Bt7,290 million for the first three months of 2013. In the medium term, FFO is expected to continue to grow, driven by the 3G services and strong prospects for data services. The cash flow protection measures remained strong although dropped from very high levels. The ratio of FFO to total debt was 72.3% in 2012 and stood at 27.8% (non-annualized) for the first three months of 2013. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 24.4 times in 2012 and 19.4 times for the three months of 2013.

DTAC had a very low debt burden during 2010 and 2011. However, total debt climbed from Bt4,589 million in 2011 to Bt30,269 million in 2012, because DTAC has regeared and paid large amount of dividend in 2012. At the end of March 2013, total debt stood at Bt26,269 million. As a result, the debt to capitalization ratio climbed to 43.6% as of March 2013, compared with abnormally low levels of about 11.5% at the end of 2010 and 2011. During the medium term, DTAC’s leverage is expected to rise to support the 3G network expansions. DTAC’s strong operating performance and relationships with financial institutions will provide sufficient financial flexibility for its future capital expenditure requirements. However, the rating could be under pressure if the funding requirements for the 3G rollout, or other factors, push leverage higher than expected and significantly weaken the company’s balance sheet. In addition, DTAC is expected to balance its dividend payouts with the need to retain cash for future investments and demonstrate an adequate financial cushion.

The wireless industry service revenue (excluding IC) in 2012 and for the first three months of 2013 remained strong. Revenue in the industry grew by around 10% y-o-y in 2012 and for the first three months of 2013. Revenue for 2013 is expected to keep the growth pace, backed by the commercial launch of 3G services and strong growth in value-added services (VAS). The mobile service providers have to put efforts to motivate their subscribers to use the 3G networks. The competition in terms of promotional campaign and marketing activities is expected to intensify.

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