Fitch Affirms AIS at #BBB+#/#AA+(tha)#, AWN at #AA+(tha)#

Stocks and Financial Services Press Releases Monday October 16, 2017 16:21
Bangkok--16 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 a Stable Outlook. The agency has also affirmed its National Long-Term Rating at 'AA+(tha)' with a Stable Outlook and National Short-Term Rating at 'F1+(tha)'.

At the same time, Fitch has affirmed subsidiary Advanced Wireless Network Company Limited's (AWN) National Long-Term Rating at 'AA+(tha)' with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

High Investment, Low Rating Headroom: Fitch expects the rating headroom of mobile-phone operator AIS, headquartered in Bangkok, to remain low in 2017 and 2018 due to high capex and spectrum payments. We forecast AIS's free cash flow (FCF) will be negative as cash flow from operations is unlikely to cover capex and dividend payouts. We estimate AIS's FFO adjusted net leverage will stay around 2.0x in 2017 and 2018 (end-1H17: 1.8x).

More Rationalised Competition: Fitch expects price competition in the Thai telecom sector to stabilise in 2H17 and 2018 as operators shift their focus to profitability rather than market share, and scale down their handset subsidies. Since 1Q17, AIS and Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable) have been reducing their handset subsidies and offering subsidies only on post-paid plans. We expect True Corporation Public Company Limited's mobile unit (True Mobile) to reduce its handset subsidies for the pre-paid segment in 2H17, after having passed DTAC in service revenue market share in 1Q17.

Earnings Recovery: Fitch expects AIS's operating EBITDAR to improve strongly to around THB72 billion in 2017 from THB63 billion in 2016, led mainly by the reduction in its handset subsidy expense. Marketing expense (including handset subsidies) as a percentage of AIS's service revenue dropped significantly to 8% in 1H17 from 14% in 2016. In addition, AIS's earnings should benefit from the cut in the universal service obligation (USO) fee in May 2017 to 2.5% of licence holders' service revenue from 3.75%. In 1H17, AIS's EBITDAR margin improved to 46% from 41.4% in 2016.

Data Supports Revenue Growth: Fitch expects AIS's service revenue (excluding interconnection charges) to grow by around 5%-6% in 2017. This should be supported by continued growth in mobile-data usage and a growing fixed-broadband subscriber base. Fitch forecasts AIS's mobile-service revenue to grow moderately at around 3%-4%, as strong growth in non-voice services will be partly offset by a decline in voice revenue, while fixed-broadband revenue is likely to increase significantly to around THB2.5 billion in 2017 from THB860 million in 2016.

Leading Market Position: AIS has maintained its leading market position as the largest mobile-phone operator in Thailand by service revenue in the past several years. Fitch believes AIS should be able to maintain its service-revenue market share of around 50% in the medium term (2016: 49%). AIS benefits from economies of scale due to its large subscriber base. AIS's market position is also supported by its strong brand and extensive network coverage.

AIS-AWN Ratings Equalised: AWN's ratings are equalised with those of AIS to reflect the strong links between the two companies, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. AIS fully owns AWN and controls its management and operations. AWN was awarded 2.1GHz and 1.8GHz licences and won the auction for the 900MHz spectrum in May 2016. AWN is of strategic importance to its parent as the operator of AIS's licensed business.

DERIVATION SUMMARY

AIS's credit profile is supported by its strong market position as the largest mobile-phone operator in Thailand and its conservative financial profile. AIS is rated higher than its domestic peer, DTAC, due to the latter's smaller size, weaker market position and lower profit margin. DTAC's ratings incorporate a one-notch uplift from the linkages with its parent, Telenor ASA of Norway, which has strong board and management control of DTAC.

AIS's credit profile is comparable to the Philippines' largest telecom operator, PLDT Inc. (PLDT, BBB/AAA(phl)/Stable). Both are the largest telecom operators in their respective markets. Although PLDT has higher financial leverage than AIS, PLDT's business profile is stronger due to its more diversified telecom services, which include both fixed-line and mobile services.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Mid-single digit service revenue growth in 2017 and 2018
  • Operating EBITDAR margin to improve to 45%-47% in 2017 and 2018 (2016: 41.4%) due to lower handset subsidies and a reduction in the USO fee
  • THB40 billion-45 billion a year for network capex in 2017 and 2018 (2016: THB47.6 billion)
  • Payment for acquisition of internet-service provider CS Loxinfo in 2018
  • 70% dividend payout ratio
RATING SENSITIVITIES
AIS
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive FCF and an operating EBITDAR margin above 45%, both on a sustained basis
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-FFO adjusted net leverage rises above 2.0x on a sustained basis or
-Unfavourable regulatory changes
AWN
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive rating action on AIS, provided that the linkages between AIS and AWN do not weaken
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-Negative rating action on AIS
LIQUIDITY

Manageable Liquidity: AIS's liquidity should be manageable even though FCF is likely to be negative in 2017. Its liquidity should be supported by a cash balance of THB11.2 billion and available committed bank facilities of THB8.1 billion at end-2016, which should be enough to cover short-term debt of THB11.6 billion at end-2016. Its ability to access the local debt market should also provide liquidity to support the likely negative FCF in 2017.

FULL LIST OF RATING ACTIONS
Advanced Info Service Public Company
  • Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
  • Long-Term Local-Currency IDR affirmed at 'BBB+'; Outlook Stable
  • National Long-Term Rating affirmed at 'AA+(tha)'; Outlook Stable
  • National Short-Term Rating affirmed at 'F1+(tha)'
Advanced Wireless Network Company Limited