Fitch: TOT Deal Positive for DTAC#s Growth but Cash Flows Weaken

Stocks and Financial Services Press Releases Monday May 29, 2017 09:50
Bangkok--29 May--Fitch Ratings

TOT Public Company Limited's (TOT) decision to enter into negotiations with Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable) for the rights to use TOT's 2.3GHz spectrum is positive for DTAC, Fitch Ratings says. Should the companies come to an agreement, we believe that DTAC's market position will be strengthened as its relatively weak spectrum portfolio has constrained its business.

However, additional contract payments, the potentially high acquisition cost for the upcoming 1.8GHz spectrum auction in 2018 and the likely elevated network capex could put more pressure on DTAC's earnings, cash flow and financial leverage in the medium term.

On 24 May 2017, DTAC announced that TOT's board had approved the start of the contracting process for DTAC's subsidiaries to provide wireless service on the 2.3GHz spectrum. DTAC has offered TOT an annual fixed payment of THB4.5 billion for the right to use the spectrum.

Fitch expects DTAC's EBITDA to decline by around 5% to THB24 billion-25 billion in 2017 from THB26 billion in 2016, partly due to payment for the 2.3GHz contract. In addition, the high upfront spectrum payment in 2018 and the likely elevated capex will raise net debt, which will likely raise DTAC's financial leverage during the period. However, DTAC has moderate financial leverage and has suspended dividend payment for 2016 performance, so we expect that its FFO-adjusted net leverage should remain below 2.5x in the next two years (end-1Q17: 1.9x), in line with its current ratings.

We may consider negative rating action should the company's FFO-adjusted net leverage be sustained above 2.5x due to intense competition in the upcoming spectrum auction that results in DTAC paying significantly more than we expect to acquire spectrum.

Fitch believes that additional 2.3GHz spectrum and further investment should help improve DTAC's network quality and stem the decline in its market share and revenue. Among the three private mobile operators, DTAC has the weakest spectrum portfolio and has been the least aggressive in network investment due to its spectrum constraint. These factors were the key reasons for DTAC's continued loss of market share to its competitors over the past few years.

Improvement in DTAC's spectrum portfolio could also lead to a healthier competitive environment among the mobile operators. Currently, DTAC is forced to compete mainly on price and generous data allowance to defend its market share due to its limited spectrum and inferior network quality. We believe that DTAC may be less aggressive on pricing and more focus on service quality once its spectrum and network quality improve. DTAC's network capex is likely to increase over the medium term as the company strengthens its network.

Fitch believes that DTAC will need more spectrum over the next two years – on top of TOT's 2.3GHz spectrum - to replace the 35MHz spectrum that is part of the 2G concession expiring in 2018. DTAC is likely to participate in the 1.8GHz spectrum auction, which is due in 2018, as the company still relies on this frequency to provide 3G and 4G services. Also, the 2.3GHz-compatible handsets are not popular in Thailand, and DTAC may need to offer deep handset subsidies to encourage its subscribers to move to the new spectrum.

Latest Press Release

Siam Commercial Bank Partners with Chaixi Bameekiao and Visa To facilitate QR payment for noodle franchise

- Ms. Pimjai Tongmee, SCB's Payment Product Sales and Delivery Division Executive Vice President - Mr. Panrob Kamla, President of Chaixi Bameekiao Co. Ltd - Mr. Suripong Tantiyanon, Country Manager for Visa Thailand "Siam Commercial Bank" (SCB)...

Isotropic Systems Raises $14 Million in Series A Funding Led by Boeing HorizonX Ventures to Advance Space-Based Connectivity

- Isotropic's approach to next-generation integrated terminal creates profound change in terminal economics and performance to unlock the satellite industry's full potential Isotropic Systems Ltd., the next-generation integrated satellite terminal...

Global economic growth expected to slow in 2019

The global economy as a whole is expected to slow in 2019 as G7 countries return to long-run average growth rates, according to new projections from PwC in its latest Global Economy Watch. PwC expects that the pick up in growth of most major economies...

QNB Group: Financial Results for the Year Ended 31 December 2018

QNB, the largest financial institution in the Middle East and Africa (MEA) region, announced its results for the year ended 31 December 2018. (Photo: ) Net Profit for the year ended 31...

CIMB THAI announces 2018 financial results with increased in operating income due to loan growth and lower gross NPL ratio. To fully move forward with Fast Forward program.

- Net interest income increased THB 544.3 million YoY mainly from loan expansion and higher interest income on investments. - Profit before tax of THB 271.2 million. - NPL ratio of 4.3% compared to 4.8% YoY due to more efficient risk management policies...

Related Topics