TRIS Rating has affirmed the company rating of True Corporation PLC (TRUE) at “BBB” and has affirmed the ratings of TRUE’s existing senior debentures at “BBB-”. At the same time, TRIS Rating has assigned the rating of “BBB-” to TRUE’s proposed issue of up to Bt6,000 million in senior debentures. The outlook remains “negative”. TRUE plans to use the proceeds from the new debentures for debt refinancing and business expansion. TRUE’s credit ratings reflect the leading position as an integrated telecom company with established infrastructure in various technological platforms; strong market positions in fixed-line broadband Internet and pay-television (pay-TV) segments; and expected continuing financial supports from major shareholders. These strengths are offset by intense competition in core businesses, heightened risks from aggressive investments in the mobile segment, and very high financial leverage. The “negative” outlook reflects the risks that TRUE’s operating performance and capital structure will not improve as expected given significant front-loaded investments in the mobile business and intense market competitions in the mobile and pay-TV businesses. TRUE’s ratings could be downgraded if the company’s performance does not show recovery signs within 2014 or capital structure does not improve within the next 12 months. The ratings could be positively adjusted if TRUE could complete the IFF transaction and its operations have improved strongly as expected.
TRUE was incorporated in 1990. The company is engaged in three business segments: “TrueOnline” provides fixed-line in Bangkok Metropolitan Area (BMA) and broadband internet; “True Mobile” provides mobile services; and “TrueVisions” offers pay TV services. In 2012, TRUE’s revenue stood at Bt89.4 billion. Revenue contributions from the three businesses were 26%, 63%, and 11%, and EBITDA contributions (earnings before interest, taxes, depreciation, and amortization) were 60%, 29%, and 12%, respectively.
TRUE’s business profile is strong. TrueOnline’s strong market position in the broadband internet market reflects revenue market shares at about 39% nationwide and about 68% in Bangkok Metropolitan Areas (BMA). The company is the largest pay-TV operator and the third rank mobile phone operator in Thailand. TrueVisions had about 733,000 pay-TV subscribers and 1.5 million free-TV subscribers as of June 2013. True Mobile holds about 16% of service revenue share in the mobile industry. TRUE’s credit ratings take into account expected strong supports from the CP Group, one of Thailand’s leading conglomerates. The CP Group holds about 63% of TRUE’s outstanding shares as of August 2013.
TRUE’s financial profile during the past 18 months was below TRIS Rating’s base-case expectation. Although the company’s revenues grew by 9.7% in the first half of 2013 and 24.2% in 2012 compared with the same period a year ago, an increase in TRUE Mobile’s network investments to support first-mover advantage in 3G services, as well as higher operating costs in TRUE Mobile and TrueVisions had pressured TRUE’s operating margins (operating income before depreciation and amortization as a percentage of revenue) to 19.3% in the first half of 2013, compared with 18.7% in 2012 and 23.8% in 2011. The debt to capitalization remained very high at 91.5% as of June 2013.
For the next three years, TRIS Rating’s base-case expects TRUE’s revenues in a range of Bt94-Bt111 billion per annum, or an annual growth rate of 6%. The growth drivers are fixed-line’s broadband internet and mobile’s non-voice services. TRUE is facing a revenue downside risk in late 2014 when the one-year transition period for TrueMove’s 2G services expires. TRUE Mobile may not be able to completely migrate all 2G subscribers and its revenue may contract up to 5%, under TRIS Rating’s base-case. TRUE’s operating margins are expected to remain under tight competitive pressures during 2013-2014 and should improve in 2015 to about 25% when the 2G network is shutdown and all subscribers are under the 3G network, which has competitive regulatory costs. The margin improvements in 2015 also reflect an expectation that TRUE Mobile’s front-loaded spending to gain market shares will decrease to match its revenue growth potentials. TRUE is expected to generate funds from operations (FFO) in a range of Bt10-Bt12 billion per annum during 2013-2014. The FFO is expected to improve to Bt18-Bt19 billion in 2015-2016 as a result of margin improvements. The capital expenditures, including 3G license costs, are expected at Bt18-Bt20 billion per annum for the next three years.
TRUE’s credit profile reflects an expectation that the company will be able to recapitalize its capital structure within the next 12 months. In October 2013, TRUE’s shareholders approved the company to set up infrastructure fund (IFF) to raise about Bt60-Bt80 billion. TRIS Rating expects TRUE to receive a net proceed of about Bt44 billion after deducting a one-third investment in the IFF. Most of the proceeds are expected to be used for debt repayments. TRUE’s equity is expected to increase by about Bt40 billion from gains on asset sales. TRUE will incur committed lease payments and transfer the rights to receive certain revenues to the IFF for about Bt5 billion per annum for 12-14 years. TRIS Rating considers the present value of both committed payments, estimated at Bt40 billion, as interest-bearing debts. In TRIS Rating’s view, the IFF will help improve TRUE’s debt to capitalization to about 67% and enhance the company’s future funding flexibility. The ratings of TRUE’s senior debentures are one notch below the company rating due to a high level of secured debts compared with total assets.
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