TRIS Rating has affirmed the company and senior debenture ratings of Total Access Communication PLC (DTAC) at “AA-” with “stable” outlook. 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 huge investment looming. The telecom industry is moving ahead on a clearer path after the auction of 3G license. However, pending argues remain persistent but the probability of seeing material adverse legal outcomes is believed to be subsided. The “stable” outlook is based on the expectation that DTAC will continue to maintain its strong market position and good operating performance. TRIS Rating also expects DTAC to deliver business on 3G platforms without a material deterioration in its competitive position and financial profile.
DTAC holds a strong market position as the second-largest cellular phone service provider in Thailand, with about 30% share of subscribers and service revenues. At the end of June 2013, DTAC had a total of 27.2 million subscribers and generated revenue of Bt48,454 million for the first six months of 2013. DTAC’s business strength is 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 August 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 13% year-on-year (y-o-y) for the first six months of 2013. The rise was driven mainly by the strong growth in revenue from data services. DTAC’s operating margin as a percentage of sales dropped from 34.3% in 2011 to 30% each in 2012 and for the first six months of 2013, due mainly to an increase in revenue sharing costs and thinner margin on sales of handsets.
DTAC launched the TriNet brand and began offering its 2.1GHz 3G services on 23 July 2013. DTAC expects to have 8-10 million subscribers on its 2.1 GHz 3G network by the end of 2013. While the voice demand reached the matured stage, data services will be a key growth driver and help secure DTAC’s revenue stream in the long run. DTAC will benefit from cost-saving because the fees under licensing regime are lower than the revenue sharing paid under the concession. DTAC’s margins are expected to improve significantly once the revenue contribution from new 3G services materializes. However, in the medium term, investment for network rollout and expenses for marketing activities are expected to be high. The spending targets to drive TriNet brand awareness, draw new 3G subscribers, and stimulate Internet usage.
DTAC’s financial strength is underpinned by its strong cash flow and ample liquidity. Funds from operations (FFO) ranged from Bt21,500 million to Bt22,500 million per annum during the last three years. FFO was Bt12,572 million for the first six months of 2013. In the medium term, FFO is expected to continue to grow, driven by the new 3G services and strong prospects for data services. The cash flow protection measures remain strong. The ratio of FFO to total debt was 72.3% in 2012 and stood at 100.8% at the end of June 2013, based on the trailing 12 months.
DTAC levered up by taking new debt and paying a large dividend in 2012. As a result, the debt to capitalization ratio climbed to 46.5% at the end of 2012, and 40.8% as of June 2013, compared with an abnormally low level of about 11.6% at the end of 2011. Going forward, DTAC’s leverage is expected to rise as DTAC plans to expand 3G network. The company plans to spend Bt14,500 million in capital expenditures for the network rollout in 2013 and about Bt20,000 million in total during 2014 and 2015, on top of the scheduled license fee payments. While entering the new investment cycle, DTAC will continue high dividend payouts policy. The ratings could be under pressure if all financing needs push leverage higher than expected and significantly weaken the company’s balance sheet. However, TRIS Rating expects that DTAC’s strong operating cash flow and good relationships with financial institutions will provide sufficient financial flexibility for its future capital expenditure requirements.
Service revenue (excluding the IC) in the wireless industry remained solid in 2012 and for the first six months of 2013. Revenue in the wireless industry grew by around 10.5% in 2012 and 9% y-o-y for the first six months of 2013, driven by higher revenues from data services. Data services grew strongly with an average annual growth rate of 34% during 2010-2012, and rose by 40% y-o-y for the first six months of 2013. In contrast, voice services grew minimally by an average of 3.5% per annum during 2010-2012, and dropped by 1.4% for the first six months of 2013. Across the industry, revenue from VAS (value-added services) was about 30% of total service revenue, compared with the 16% contribution in 2010 and 19% in 2011. Prospects for data services remain optimistic. Total service revenue for 2013 is expected to continue to grow, driven by the commercial launch of 3G services and strong growth in data and mobile Internet service revenues. The three major wireless service providers in Thailand are expected to be more aggressive in terms of marketing activities and incentives to draw subscribers to new 3G network and motivate mobile Internet usage. They have offered more house-brand smart phones, bundled with Internet package service. As of June 2013, about 10 million subscribers use the 3G services across the industry. The number of 3G subscribers is expected to rise to 25 million subscribers by the end of 2013.