The rating upgrade reflects the improvement in AIS's business profile following the acquisition of Thailand's second-largest broadband operator, Triple T Broadband Public Company Limited (TTTBB). Fitch sees the acquisition as credit accretive, supporting AIS's revenue diversification into non-mobile services, strengthening its market position and supporting medium-term revenue growth and earnings stability. Fitch expects AIS to maintain a strong post-acquisition financial profile with EBITDA net leverage of around 1.4x in 2023 and 2024 (2022: 1.0x).
The Stable Outlook reflects Fitch's expectation AIS will continue to maintain its solid market position in Thailand's telecom sector, generate solid earnings and keep financial leverage consistent with its ratings.
KEY RATING DRIVERS
Ratings Equalised: AIS's and AWN's ratings are equalised, reflecting AIS's 'High' strategic and operational incentives, and 'Weak' legal incentive to support its mobile subsidiary, in line with Fitch's Parent and Subsidiary Linkage Rating Criteria. This is underpinned by a significant 93% and 73% contribution from AWN's mobile and broadband businesses to the group's revenue and EBITDA in 2022, respectively.
We regard management and brand overlap as 'High'. AIS fully owns AWN, enabling it to control AWN's strategy, financial policy and investments, with the common AIS brand for products sold across its mobile, broadband and content businesses.
Broadband Acquisition Credit Positive: Fitch views the acquisition of TTTBB as being in line with AIS's pursuit of a sustainable competitive position and profitable growth. The acquisition will allow AIS to diversify its mobile business to other telecom services, such as television and broadband, and strengthen its business profile. We expect revenue contribution from broadband to reach about 18% after the acquisition, from 7% previously.
The deal will also solidify AIS's market position as Thailand's second-largest fixed broadband operator, raising its broadband market share to about 35%, from 16% in 2022, close to the 38% of the largest operator, True Corporation Public Company Limited (TRUE). TTTBB will also provide AIS with access to non-city area broadband markets, where AIS has limited network coverage, and enhance its established position in the urban market.
Growth to Pick Up: Fitch expects AIS to benefit from Thailand's continued recovery from relatively weak economic growth in 2020-2022. Fitch forecasts Thailand's GDP growth will accelerate to 3.8% in 2024 after lower-than-expected growth of 1.9% in 9M23. The increase in business activity and tourism recovery should support AIS's service revenue growth (excluding the acquisition), which we forecast at around 2%-3% a year during 2023 and 2024 (9M23: 2.3% growth).
Increasingly Rational Competition: Fitch believes the sector will benefit from the increasingly rational price competition in Thailand, which will support AIS's average revenue per user and revenue growth. The Thai mobile industry has demonstrated signs of healthier growth from a stabilisation in competition after the merger between TRUE and Total Access Communication Public Company Limited was completed in 1Q23. Operators have shifted their focus to profitability from market share gains by gradually reducing their offers of unlimited data packages.
Higher, but Healthy, Leverage: We expect AIS's EBITDA net leverage to increase to around 1.4x by end-2023, following the acquisition of TTTBB (end-9M23: 1.1x). This is still below the 2.0x level at which we would consider a rating downgrade, although the rating headroom will narrow. Fitch expects AIS's leverage to improve gradually in 2024 and 2025, supported by earnings improvement.
Leading Market Position: Fitch believes AIS will be able to maintain its service-revenue market share of around 48% in the medium term (2022: 47%). It benefits from economies of scale due to its large subscriber base, a strong brand and extensive network coverage. AIS is also diversifying into fixed-broadband services, with revenue rising strongly over the past few years, leading to a market share of around 16% in 2022.
DERIVATION SUMMARY
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 market leaders in their industries. AIS has narrower geographical diversification, but its National Long-Term Rating is higher than that of ThaiBev by two notches due to AIS's lower financial risk.
AIS's National Long-Term Rating is at the same level as that of PTT Public Company Limited (AAA(tha)/Stable), the largest fully integrated oil and gas company in Thailand. AIS has a slightly weaker business profile than PTT. PTT's business is larger and more diversified, which help offset the volatility in individual business segments, while AIS's telecom business is more stable. AIS has a conservative financial profile with EBITDA net leverage of around 1.4x, compared with around 2.0x for PTT.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Service revenue growth of around 3% per annum in 2023 and 2024, reflecting an improvement in the economy and more rational price competition
- Operating EBITDA margin of around 42% in 2023 (9M23: 42.3%) before decreasing to around 38% in 2024 after the consolidation of the lower-margin TTTBB business
- THB30 billion per annum in network capex in 2023 and 2024 (2022: THB27.8 billion)
- 95% dividend payout ratio
RATING SENSITIVITIES
AIS
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- No positive action is possible, as the rating is the highest on the National Rating scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- EBITDA net leverage above 2.0x for a sustained period
- Unfavourable regulatory changes
AWN
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- No positive action is possible, as the rating is the highest on the National Rating scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on AIS
- Incentives for AIS to support AWN weaken, although we believe this is highly unlikely
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: AIS has THB27 billion in debt maturing over the next 12 months from end-September 2023. Fitch believes its liquidity is manageable, supported by a cash balance of THB16 billion and ability to access the domestic debt capital market, given its strong credit profile.
ISSUER PROFILE
AIS, Thailand's largest mobile-phone operator, has a 48% service revenue market share and also offers fixed-broadband services nationwide with 2.2 million subscribers, accounting for around 16% of the subscriber market. Intouch Holdings Public Company Limited and Singapore Telecommunications Limited (A/Positive) are major shareholders with 40% and 23% stakes, respectively.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
AWN's ratings are equalised with AIS's ratings.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings