Fitch Affirms Advanced Info Service at BBB+/AA+(tha)

Stocks and Financial Services Press Releases Thursday October 29, 2015 10:43
Bangkok--29 Oct--Fitch Ratings

Fitch Ratings has affirmed Thailand-based telecommunications company Advanced Info Service Public Company Limited's (AIS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+', with Stable Outlook. The agency has also affirmed its National Long-Term Rating at 'AA+(tha)' with Stable Outlook, and National Short-Term Rating at 'F1+(tha)'.

KEY RATING DRIVERS

Low Single-Digit Growth: Fitch expects AIS's service revenue to grow by 2%-3% in 2015 and 2016, compared with 1.2% growth in 2014. This should be supported by strong growth in data revenue of 25%-30% during the period. Nevertheless, AIS's voice revenue will continue to drop by 10%-15% a year over the next two years, due to intense competition in a saturated market.

Strong Position in Data: AIS will continue to reap greater benefits than its competitors from consumers' increasing in data usage, due to its superior network quality. The company invested heavily in its 3G network over the past two years, strengthening its data service quality, despite the lack of 4G service. Growth in its non-voice revenue was strong, outpacing the industry's expansion over the past two years; AIS's non-voice revenue market share improved by 115bp to 50.4% in 2Q15 from 49.3% in 2Q14.

Competition Weighs on Profitability: Fitch expects Thai telecommunications companies to continue their aggressive marketing activities in 2H15 and 2016, including providing handset subsidies and offering unlimited-data subscription plans, which could hinder improvement in their profitability. The increase in marketing expenses and handset subsidy costs are likely to offset the significant reduction in regulatory cost. Fitch forecasts AIS's operating EBITDAR margin in 2015 to be unchanged from 2014's 45%.

Flexibility to Support Investment: AIS's free cash flow (FCF) is likely to be negative in 2015 and 2016, due to high capex for network expansion and spectrum acquisition. Financial leverage will increase as a result, but Fitch believes that AIS's credit profile will remain commensurate with its current ratings. Its large rating headroom, with funds flow from operations (FFO) adjusted net leverage of 0.6x at end-1H15, should provide financial flexibility to support the investment.

Leading Market Position: AIS has maintained its market position as the largest mobile phone operator in Thailand by revenue over the past several years. Fitch believes that AIS should be able to maintain its service revenue market share of greater than 50% over the medium term (2014: 52.7%). The company benefits from a competitive cost structure due to its large subscriber base. AIS's market position is also supported by its strong brand and extensive network coverage.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for AIS include:
  • 2%-3% service revenue (excluding interconnection charge) growth in 2015 and 2016
  • Operating EBITDAR margin in 2015 to be unchanged at 45%, and gradually improve from 2016 onwards
  • THB30bn-35bn a year network capex in 2015 and 2016
  • Acquisition of new spectrum (900MHz and 1.8GHz) in 2015
-100% dividend payout ratio
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
  • An increase in FFO-adjusted net leverage above 1.5x on a sustained basis
  • Unfavourable regulatory changes
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
  • Sustained positive free cash flow
  • Operating EBITDAR margin above 45% on sustained basis (2014: 45%)
LIQUIDITY

Strong Liquidity: AIS's liquidity should remain strong despite likely negative FCF in 2015 and 2016. Liquidity is supported by a high cash balance of THB9.1bn at end-2Q15, sturdy cash-flow generation, ability to access the local debt market, and close relationships with local banks and investors. AIS had minimal short-term debt of THB3.3bn at end-2Q15.

FULL LIST OF RATING ACTIONS
Advanced Info Service Public Company Limited