Fitch: 4G Spectrum Win Reduces Advanced Info Services Rating Headroom

Stocks and Financial Services Press Releases Monday November 16, 2015 15:59
Bangkok--16 Nov--Fitch Ratings

Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable), which won 4G spectrum at a recent auction in Thailand, should have sufficient buffer to support the investment, although its credit metrics are likely to deteriorate, which will reduce its rating headroom, Fitch Ratings says.

The final prices for Thailand's 1.8GHz telecoms spectrum at the auction on 12 November 2015 were significantly higher than Fitch's expectation. If the competition in the 900MHz spectrum auction scheduled for December 2015 is equally intense and AIS acquires the spectrum at a significantly higher price than we expect, we may consider negative rating action should the company's funds flow from operation (FFO)-adjusted net leverage rise above 1.5x.

The high upfront spectrum fee and sustained high capex for network expansion will raise net debt for most telcos, and thus their financial leverage is likely to deteriorate over the next two years. Free cash flow will be negative as these operators are likely to maintain high dividend payouts. Fitch estimates AIS's FFO-adjusted net leverage will rise by 0.5x over the next two years due to the additional investment in 1.8GHz spectrum. At end-9M15, FFO-adjusted net leverage for AIS, Thailand's largest mobile phone operator by revenue, remained low at 0.8x.

Advanced Wireless Network Company Limited (AWN; AA+(tha)/Stable), a wholly owned subsidiary of AIS, and True Move H Universal Communication Company Limited, a subsidiary of True Corporation Public Company Limited (True; Not Rated), won the auction for 1.8GHz spectrum licences with final prices of THB41.0bn and THB39.8bn respectively, compared with the starting auction price of THB15.9bn.

The stiff competition at this auction suggests that the next one for 900MHz could be equally intense. Operators, particularly those who did not win any 1.8GHz spectrum, are likely to compete aggressively to secure the spectrum, which will be crucial to remain competitive in an environment where data is increasingly important to drive revenue growth.

Fitch expects additional spectrum to boost telcos' network capacity and help mobile operators meet the expected rapid growth in mobile data traffic, which is likely to continue to be main driver of operators' traffic growth as data services are increasingly adopted by the mass-market consumer. As data use grows, operators face the challenge of monetising this additional traffic, as unlimited data packages are still prevalent in the market.

AIS is likely to benefit most from the new spectrum allocation, enabling it to launch 4G services. AIS has been slow in launching new services and technology compared with its competitors because of limited bandwidth; the company had only 15MHz operating bandwidth on the 2.1GHz spectrum, which was largely occupied by 3G services and left no room for 4G services. Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable), the second-largest operator by revenue, has the largest operating bandwidth of 50MHz, while True Corporation Public Company Limited's mobile business has 30MHz (including the 850Mhz spectrum rented from CAT Telecom Public Company Limited). Both have provided the 4G service on a limited scale.

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