Advanced Info Service Public Co. Ltd. #BBB+# Rating Outlook Remains Negative

Stocks and Financial Services Press Releases Monday March 26, 2018 20:01
SINGAPORE--26 Mar--S&P Global Ratings

SINGAPORE (S&P Global Ratings) March 26, 2018--S&P Global Ratings today affirmed its 'BBB+' long-term corporate credit rating on the Thai telecommunications service provider, Advanced Info Service Public Co. Ltd. (AIS). The outlook is negative.

The rating affirmation reflects our expectation that AIS will retain its position as the largest mobile network provider in Thailand, maintaining around 50% market share of service revenue (excluding interconnection). We expect the company to maintain its competitive position given its strong brand, leading spectrum holdings, and extensive high-quality network.

AIS reported 2017 EBITDA of Thai baht (THB) 70.5 billion (versus our estimated THB68 billion) on better cost management, thinner handset subsidy, and lower regulatory fee expenses amid moderately rising revenue. While capital expenditures and dividend payout were mostly in line with our expectations for the year, discretionary cash flow generation remained negative for the year and we expect it to stay weak over the next 12 months.

That said, the company's debt-to-EBITDA ratio of 2.2x was significantly below our expectation. The lower-than-expected leverage was because AIS did not enter into a long-term contract (estimated at THB9.5 billion per year) with TOT Public Co. Ltd. for the 2.1 GHz spectrum, telecommunication towers, and 2G equipment as earlier anticipated. If AIS had done so, this would have added approximately THB40 billion of adjusted debt, keeping leverage elevated at about 2.7x for the end of the year.

AIS continued its arrangement with TOT as a commercial trial, signing a multi-year lease at the start of this year just for the 2.1 GHz spectrum. In this agreement, AIS will pay TOT an annual fee of THB3.9 billion to use 80% of TOT's 2.1 GHz spectrum. Although AIS will continue to pay rental for TOT's towers and 2G equipment, long-term contracts have not been signed and thus does not attract our imputed debt adjustment.

We believe AIS is likely to continue a pay-as-you-go arrangement for the 2G equipment because the company is looking to migrate the remaining 5% of its 2G subscribers to 3G/4G. In our opinion, a tower contract may not materialize in the near term either; both parties are discussing a venture to combine their towers into a jointly owned entity.

Although we believe this is a beneficial arrangement because TOT in turn can use AIS' network (of 16,000 2.1 GHz base stations) for its own services over the remaining 20% of the 2.1 GHz spectrum, the process toward the joint venture could be lengthy. In our view, if a joint venture does not materialize, AIS could opt to enter a long-term contract for TOT's towers at a rate in line with the current THB3.6 billion per year under the commercial trial.

The outlook remains negative because of the continuing uncertainties around the 1,800 MHz and 850 MHz spectrum auction expected this year. Although we expect AIS to participate, Thailand's regulator, the National Broadcasting and Telecommunications Commission (NBTC), is in the process of electing a new board, which may opt to revamp the auction format.

In our opinion, based on the THB40.9 billion AIS paid for the 18-year 2x15 MHz license in the 1,800 MHz band in 2015, AIS may pay a similar amount for an equivalent license in the same band. Such a scenario would push leverage significantly above 2.5x. Payment for the license is likely spread over a few years, but we would include the present value of the full amount in our debt calculations because it represents a financial commitment to make full and timely payments to NBTC.

The negative outlook reflects our view that AIS' debt-to-EBITDA ratio reduction seen in 2017 may not continue and discretionary cash flow generation could remain weak. We expect leverage to increase above 2.5x in the next six to 12 months while the company looks to finalize a long-term solution for tower space with TOT. AIS will also likely participate in a coming spectrum auction amid a competitive operating environment.

We may lower the rating on one or more of the following factors:
  • AIS' debt-to-EBITDA ratio sustainably rises above 2.5x due to large capital outlays for towers or spectrum.
  • We see unabated regulatory risks in Thailand. This could be exemplified by further delays and uncertainty around the upcoming spectrum auction without a clear roadmap from NBTC.
  • AIS' market share or operating performance deteriorates, possibly due to stiff competition, particularly in its 3G and 4G businesses.

We may revise the outlook to stable if AIS maintains a sound capital structure, so that its debt-to-EBITDA ratio remains sustainably below 2.5x after the spectrum auctions and an agreement with TOT on the towers.

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