KEY RATING DRIVERS
Ratings Reflect Consolidated Profile: Fitch rates AIS and AWN on the group's consolidated profile, reflecting the strong operational linkages between the two companies, in line with the agency's Parent and Subsidiary Linkage Rating Criteria. AIS fully owns AWN, enabling it to control the subsidiary's strategy, financial policy and investments. AWN is the operator of AIS's mobile business, accounting for 93% of group revenue and 81% of EBITDA in 2020.
Prolonged Impact from Pandemic: Fitch expects Thailand's slow economic recovery due to the resurgence of Covid-19, which began in April 2021, and the pandemic-related lockdowns to temper AIS's growth in 2021. We forecast a slow recovery for AIS with low-single-digit service revenue growth in 2022.
The Thai economy will continue to be dampened by weak demand and its high reliance on tourism, which could take time to recover. AIS's predominantly prepaid subscribers are also more likely to be affected by higher unemployment and the weak economy than post-paid customers.
Rational Competition: Fitch expects price competition in the Thai telecom sector to remain rational in 2022. Operators are likely to shift their focus to profitability from market share gains by reducing aggressive offerings. We believe these measures will support gradual data monetisation and a more sustainable data-centric business model.
Sufficient Rating Headroom: We expect AIS's FFO net leverage to rise in 2021 to around 1.3x (2020: 1.1x) as its cash flow from operations is unlikely to cover capex and dividends. AIS said capex (excluding spectrum payments) will remain high at around THB25 billion-30 billion in 2021 (2020: THB28.1 billion), while spectrum payments will drop to around THB19.5 billion in 2021 and THB11 billion in 2022 (2020: THB 28.8 billion).
Fitch believes AIS's low financial leverage of 1.1x at end-2Q21 will provide sufficient headroom to support higher capex and additional spectrum investment in the medium term.
High Financial Flexibility: Fitch believes AIS will be able to manage its leverage, including reducing 5G investment or dividends if 5G demand is weaker than it expects. AIS is expanding 5G coverage to major cities after a commercial launch in 4Q20. Demand for 5G services in Thailand remains uncertain, but AIS expects the early use of fixed-wireless broadband to help expand its broadband service coverage. We expect a low initial return for 5G services and high capex to roll out the networks to constrain AIS's free cash flow (FCF) over the next two years.
Market Leadership: We believe AIS, Thailand's largest mobile-phone operator, can maintain its service-revenue market share of around 45%-50% in the medium term (2Q21: 46%). It benefits from economies of scale due to its large subscriber base, a strong brand and extensive network coverage. AIS is diversifying into fixed-broadband (FBB) service, with revenue rising over the past few years, leading to market share of around 12% in 2020 (2018: 8%). Nevertheless, FBB revenue contribution remained low at around 6% of AIS's total service revenue in 1H21.
DERIVATION SUMMARY
AIS's credit profile is supported by its solid market position as Thailand's largest mobile-phone operator and its conservative financial profile. AIS is rated higher than domestic peer, Total Access Communication Public Company Limited (DTAC; AA(tha)/Negative), which is smaller, and has a weaker market position and higher financial leverage. DTAC's 'AA(tha)' ratings incorporate a one-notch uplift from its Standalone Credit Profile (SCP) of 'aa-(tha)' due to the moderate linkages with its parent, Telenor ASA of Norway, which has strong board and management control over the company.
AIS's credit profile is stronger than that of Thai Beverage Public Company Limited (ThaiBev, AA(tha)/Stable), Thailand's largest beverage producer with a strong market position in spirits and a leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar. They both have comparable business profiles as they are strong market leaders in their industries. AIS has narrower geographical diversification, but its National Long-Term Rating is higher than that of ThaiBev by one notch due to AIS's lower financial risk.
AIS's National Long-Term Rating is one notch lower than that of PTT Public Company Limited (AAA(tha)/Stable), the largest fully integrated oil and gas company in Thailand, because AIS has a weaker business profile. PTT's business is larger and more diversified than that of AIS. PTT is the sole operator in mid- and downstream gas operations, one of Thailand's major upstream producers, and a dominant company in the oil and petrochemical industries. Both have conservative financial profiles with FFO net leverage of around 1.2x-1.3x for AIS and 2.0x for PTT.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Slow revenue growth of 1%-2% in 2021 due to weak demand following the resurgence of Covid-19 cases and the restrictions to fight the pandemic in 2Q21 and 3Q21; growth to recover to 3%-4% in 2022, reflecting an improvement in the economy as restrictions ease.
- Operating EBITDA margin of 42%-43% in 2021 and 2022 (1H21: 43%)
- THB30 billion a year in network capex in 2021 and 2022 (2020: THB28.1 billion)
- 80% dividend payout ratio
RATING SENSITIVITIES
AIS
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive FCF and FFO net leverage reduced to below 1.0x on a sustained basis without deterioration in revenue market share
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO net leverage above 1.8x for a sustained period
- Unfavourable regulatory changes
AWN
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive rating action on AIS, provided linkages between AIS and AWN do not weaken
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on AIS
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: Fitch believes AIS's liquidity is manageable, supported by its cash balance of THB17 billion at end-1H21, which is enough to cover THB12.7 billion in debt maturing over the next 12 months. AIS is likely to generate negative FCF of around THB5 billion in 2021 due to high capex for 5G rollout and spectrum payments, but we expect the company to be able to raise new debt to support the shortfall. Fitch believes AIS has strong ability to access domestic debt capital in light of its robust credit profile. In addition, AIS's liquidity is supported by an undrawn credit facility of THB15 billion at end-1H21.
ISSUER PROFILE
AIS is Thailand's largest mobile-phone operator and also offers fixed broadband services nationwide with 1.5 million subscribers at end-2Q21, accounting for around 12% of subscriber market share. Intouch Holdings Public Company Limited and Singapore Telecommunications Limited (A/Stable) are major shareholders with 40% and 23% stakes, respectively.
Source: Fitch Ratings