TRIS Rating has revised the rating outlook of True Corporation PLC (TRUE) to “negative” from “stable”, to reflect TRUE’s weakened equity base despite the set up of an infrastructure fund (IFF). The IFF has not generated adequate gains as expected to enhance the company’s financial flexibility. TRUE’s headroom in strategic implementation continues to be very limited amid rising challenges in the operating environment of the telecom sector. TRIS Rating has affirmed the company rating of TRUE at “BBB” and the ratings of its existing senior debentures at “BBB-”.
TRUE’s credit ratings continue to 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, aggressive operating and investment costs to sustain competitiveness, and very high financial leverage.
The outlook revision to “negative” from “stable” reflects TRUE’s weakened equity base and the company’s limited strategic headroom and financial flexibility amid rising competitive and investment pressures in the telecom sector. TRUE’s ratings could be downgraded if the company’s performance weakens further or its capital structure does not improve over the next 6-18 months. The outlook could be revised back to “stable” if the company could strengthen its cash flow generations or implement a concrete recapitalization plan.
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 services nationwide; “True Mobile” provides mobile services; and “TrueVisions” offers pay TV services. Revenue contributions from the three businesses were 24%, 66%, and 10%, and EBITDA contributions (earnings before interest, taxes, depreciation, and amortization) were 61%, 30%, and 9%, 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 BMA. The company is the largest pay-TV operator and the third rank mobile phone operator in Thailand. 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 held about 63% of TRUE’s outstanding shares as of August 2013.
TRUE’s financial profile in 2013 was below TRIS Rating’s expectation and remained very weak. Although revenue in 2013 grew by 8% to Bt96.2 billion, increases in TRUE Mobile’s network investments, 2G network maintenance cost, as well as operating costs in TRUE Mobile and TrueVisions continued to pressure operating margins (operating income before depreciation and amortization as a percentage of revenue) to 16.6% in 2013, compared with 18.7% in 2012 and 23.8% in 2011.
During 2014-2016, 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 should remain under tight competitive pressures in 2014 and are expected to 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. TRUE generated Bt17.6 billion in EBITDA and Bt7.2 billion in funds from operations (FFO) in 2013, slightly lower than TRIS Rating’s expectation. TRUE’s FFO is expected at about Bt10-Bt12 billion in 2014. The FFO is expected to improve to about Bt18-Bt19 billion in 2015-2016 as a result of the margin improvements. TRIS Rating’s base-case assumes TRUE to cover most of its capital expenditures, including 3G license costs, with the FFO.
In December 2013, TRUE raised about Bt39 billion, net of reinvested proceeds, from the IFF. TRUE incurs committed lease payments and transfers the rights to receive certain revenues to the IFF for about Bt5 billion per annum for the next 12-14 years. TRIS Rating considers the present value of both committed payments, estimated at Bt40 billion, as interest-bearing debts. As a result, TRUE’s total debts are not expected to reduce materially even though the company used certain proceeds from the IFF to repay debts. At the end of 2013, debt to capitalization was at 96.5%. TRIS Rating expects that TRUE’s equity will gradually improve after the company recognizes deferred gains from the IFF transaction, totaling Bt12 billion, over the next 3-5 years. However, TRIS Rating views that TRUE is facing heightened risks given that its three core business segments will continue to confront intense competitive and investment pressures on the back of an equity base at Bt4.7 billion as of year-end 2013. 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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