TRIS Rating has upgraded the company rating and senior debenture ratings of Total Access Communication PLC (DTAC) to “AA” from “AA-” with “stable” outlook. The upgrades reflect DTAC’s stronger business fundamental, supported by industry’s growth momentum, regulatory cost savings, and positive regulatory developments. DTAC’s ratings continue to reflect robust operating performance and market share stability. However, these strengths are partially constrained by competition in the wireless communications industry as well as the large cyclical capital expenditures. The “stable” outlook is based on the expectation that DTAC will continue to maintain its strong market position and deliver solid operating performance. TRIS Rating expects DTAC will continue to migrate traffic to the 3G network which yields larger regulatory cost savings. The ratings could be under downward pressure if DTAC’s debt to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio rises above 1.3 times over an extended period.
DTAC’s very strong business profile reflects its established market position as the second-largest cellular phone service provider in Thailand. DTAC has about 30% shares in terms of subscribers and service revenues. In 2013, DTAC had a total of 27.9 million subscribers and generated revenue of Bt94,617 million. The company’s strong market position ensures the sustainability of its revenues and cash flows. DTAC’s business strength is further supported by its established brand equity and an extensive wireless network. DTAC’s ratings take into account group support from Telenor ASA (Telenor), a leading Norwegian telecommunications company. As of December 2013, Telenor held a 42.6% stake in DTAC.
DTAC’s service revenues, excluding interconnection charge (IC), grew by 10.4% year-on-year (y-o-y) in 2013, compared with 5%-8% annual growth during 2010-2012. The growth driver is data services, supported by the popularity of social networking applications and the affordability of smartphones. DTAC began offering 2.1GHz (gigahertz) 3G (generation) services in July 2013. At the end of 2013, DTAC had about 12 million subscribers on its 3G network, or about 43% of total subscribers. In 2013, DTAC’s value-added services (VAS), including mobile Internet, mobile messaging, and mobile content, grew strongly by 49% y-o-y, compared with the industry growth at 36%.
During 2014-2016, TRIS Rating’s base case expects DTAC’s revenue to grow by 5% per annum on average. The key growth driver is data services. Solid increases in data services should offset a decline in voice revenue and secure DTAC’s growth momentum. The operating margin (operating income before depreciation and amortization as a percentage of sales) was 31.3% in 2013, improving from 29.8% in 2012. The operating margin improved because of lower regulatory costs from service revenue of 32.5% excluding IC in 2012, to 31% in 2013. The regulatory costs under licensing regime are 5.25%, compared with 30% under the concession. During 2014-2016, TRIS Rating’s base case expects DTAC’s operating margin to improve to the range of 34%-37%. The improvement reflects further cost savings from lower regulatory costs on the back of larger 3G subscriber base.
DTAC’s financial profile is underpinned by an improvement in its ability to generate cash flow and its ample liquidity. Funds from operations (FFO) increased to Bt25,682 million per annum in 2013, compared with about Bt22,000 million per annum during the last two years. During 2014-2016, TRIS Rating’s base case expects DTAC to generate FFO in a range of Bt29,000-Bt35,000 million per annum. The FFO to total debt ratio is expected to stay above 90% during 2014-2016.
DTAC’s leverage in 2013 rose slightly from the previous year as DTAC expanded its 3G network. The debt to capitalization ratio was 49% in 2013, compared with 46.5% in 2012. During 2014-2016, TRIS Rating expects DTAC to spend a total of Bt30,000 million in capital expenditures for network rollouts. The ratings also take into consideration potential payments for a new license during 2014-2016 in an estimated price range comparable to the 2.1GHz license cost. Despite entering the new investment cycle, DTAC plans to continue its high dividend payouts. DTAC should be able to strike a balance so as to maintain the debt to capitalization ratio below 50% and maintain an adequate financial cushion.