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.

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