The revised Outlook reflects DTAC's increasing funds from operations (FFO) net leverage, which reached Fitch's negative rating sensitivity of 2.3x by end-1H21 on higher dividend payments. DTAC's FFO net leverage could rise further and may be sustained above 2.3x, if the company continues with a generous dividend policy. DTAC already faces a high capex burden and slow revenue and profitability growth amid a prolonged economic recovery. High dividend payments will weaken DTAC's deleveraging capacity, putting pressure on its ratings.
KEY RATING DRIVERS
More Aggressive Shareholder Return: Increasing the dividend payment in a high investment period underscores DTAC's more aggressive shareholder return policy that could weaken its deleveraging capacity, in Fitch's view. DTAC's dividend payout ratio has increased over the past three years to 100% of net profit in 2020 and 1H21, from 75% in 2019 and 50% in 2018.
However, this is still in line with its policy to pay at least 50% of net profit in dividends and maintain net debt/EBITDA below 3x. We expect dividends in 2021 to account for around 34% of DTAC's cash flow from operations, against an average of 19% in 2018-2020.
Limited Rating Headroom: DTAC's ratings headroom is very limited, as we expect FFO net leverage to increase to 2.3x in 2021 (2020: 2.0x), above which Fitch would consider negative rating action, due mainly to higher capex and dividend payments. DTAC's capex and spectrum payments are likely to decrease in 2022, but the company may need to secure additional spectrum, particularly the mid-band 3.5GHz for its 5G rollout in the medium term.
Lower Financial Flexibility: A continued high dividend payment suggests DTAC may have less flexibility to fund additional spectrum investments without jeopardising its current credit profile in the medium term. Fitch believes prudent capital preservation, including discretionary shareholder returns, will help DTAC to reserve balance-sheet strength to step up spectrum investment when needed.
Slow Revenue Recovery: Fitch expects Thailand's slow economic recovery due to the resurgence of Covid-19 in April and the pandemic-related lockdowns in Thailand will temper DTAC's growth in 2021. Fitch forecasts a slow recovery for DTAC in 2022 with low single-digit growth in service revenue. The Thai economy will continue to be dampened by weak demand and its high reliance on tourism, which could take time to recover.
Cost Savings Support Earnings: Fitch expects DTAC's pre-TFRS16 EBITDA to remain strong at around THB23 billion-24 billion a year in 2021-2022 (2020: THB23.1 billion). Earnings will be supported by DTAC's ongoing cost controls, which resulted in the EBITDA margin improving to 35.6% in 1H21 from 34.5% in 2020. Network operating expenses as a percentage of service revenue dropped to 9% in 1H21 from 11% in 1H20. EBITDA in 2Q21 increased for the second consecutive quarter, rising to THB6.2 billion from the trough of THB4.7 billion in 4Q20.
Stronger Spectrum Portfolio: Fitch expects the 700MHz licence that DTAC obtained in December 2000 will strengthen its network coverage and service quality. DTAC is expanding its 4G network to the rural areas via the 700MHz frequency and targets to achieve 93% of population coverage by end-2021 (end-1H21: 80%). This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years.
DTAC has lost its market share over the past few years due to the intense price competition and its inferior network coverage, slipping to the third position in Thailand's mobile-phone operator market since 1Q17. We expect DTAC market share to stabilise at around 22%-23% over the medium term (2020: 22%), given its improvement in network coverage and more moderate competition in the market.
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 fading out aggressive offerings. Nevertheless, the challenging business environment could drive short-term tactical pricing strategies among telcos to preserve market share. We believe these measures will support price stability and profitable growth in the longer term.
Ratings Reflect Parent Support: We rate DTAC with a bottom-up approach using our Parent and Subsidiary Linkage Rating Criteria. The company receives a one-notch uplift to reflect moderate linkages with its parent, Norway-based Telenor ASA, which has strong board and management control over DTAC. Consequently, any changes in Telenor's ownership or the links between the two would prompt us to reassess the level of support for DTAC from its parent.
DERIVATION SUMMARY
DTAC is rated lower than Advanced Info Service Public Company Limited (AIS, AA+(tha)/Stable), the largest operator in Thailand with revenue market share of 46% in 2Q21 and a wider profit margin. AIS has a stronger financial profile with 2021 forecast FFO net leverage of 1.2x-1.3x and stronger free cash flow (FCF) profile than DTAC.
DTAC's 'aa-(tha)' Standalone Credit Profile (SCP) is stronger than that of The Siam Cement Public Company Limited (SCC, A+(tha)/Stable) - the largest cement producer in Thailand. DTAC operates in a more stable telecom sector, while SCC operates in the volatile cement and chemical sector. DTAC also has much lower leverage profile than that of SCC.
Compared with Thai Beverage Public Company Limited (ThaiBev, AA(tha)/Stable), DTAC has a weaker business profile. ThaiBev is Thailand's largest beverage producer with strong market position in spirits and a leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar. ThaiBev's financial profile is also supported by its robust FCF generation given the moderate capex. Therefore, DTAC's 'aa-(tha)' SCP is one notch below ThaiBev's National Long-Term Rating.
PTT Global Chemical Public Company Limited (PTTGC, AA+(tha)/Negative, SCP: aa-(tha)) has larger operating scale than DTAC's and benefits from its business integration with petrochemicals, as well as its low-cost position as a gas-based petrochemical producer. This is counterbalanced by its exposure to volatile petrochemical and refinery businesses. Both have similar leverage profiles of below 2.5x on a sustained basis; as a result, their SCPs are rated at the same level.
DTAC's 'AA(tha)' National Long-Term Rating incorporates a one-notch uplift from its SCP to reflect moderate linkages with its parent, Telenor, in line with notching approach for other national peers. DTAC is of strategic importance to Telenor as the key operating subsidiary in Asia. DTAC is Telenor's second-largest contributor of revenue (20.3%) and third-largest EBITDA generator (17.2%) in 1H21, just below the Norwegian operations. However, DTAC's operational integration with Telenor is limited as they operate in different countries.
DTAC's moderate linkages with its parent are similar to HMC Polymers Company Limited's (HMC, A-(tha)/Negative) linkages with parent PTTGC. HMC also receives a one-notch uplift from its 'bbb+(tha)' SCP. HMC is a propylene off-taker of PTTGC, which indicates production integration into PTTGC's propylene chain. PTTGC considers HMC as its key vehicle in the polypropylene business. However, HMC is small and accounts for around 6% of PTTGC's EBITDA.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Weak revenue growth of 1% in 2021 due to the weak demand following the resurgence of Covid-19 cases and the related restrictions in 2Q21 and 3Q21; growth to recover to around 3% in 2022, reflecting an improvement in economic activity as restrictions ease;
- Operating EBITDA margin of 35%-36% in 2021 and 2022 (1H21: 35.8%);
- THB14 billion network capex in 2021 and THB13 billion a year in 2022 and 2023 (2020: THB9.9 billion);
- THB7.5 billion dividend payments in 2021 and THB5 billion in 2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- A prudent capital preservation, including discretionary shareholder returns, resulting in FFO net leverage remaining below 2.3x on a sustained basis, may lead to the Outlook being revised to Stable.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Failure to achieve the positive rating sensitivities;
- Unfavourable regulatory changes;
- Weaker linkage between the company and its parent, Telenor.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: Fitch believes DTAC will be able to manage its liquidity in 2021. Liquidity should be supported by its cash balance of THB7.1 billion and undrawn credit facilities of THB16.5 billion at end-1H21, and its ability to access the debt capital market. DTAC has total debt of THB11.2 billion maturing over the next 12 months from end-1H21. The company already drew down THB17.5 billion in bank loans in 1H21 to repay its debt maturing in 2021 and to finance its investments.
ISSUER PROFILE
DTAC is the third-largest cellular phone operator in Thailand, with 22% service revenue market share in 2Q21. Telenor is the major shareholder of DTAC.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Source: Fitch Ratings