TRIS Rating has upgraded the company and senior unsecured debenture ratings of Total Access Communication PLC (DTAC) to “AA+” from “AA” with “stable” outlook. The upgrades reflect DTAC’s ability to maintain strong competitive position and continue solid operating performance with strong cash flow generation. The ratings are partly enhanced by the support from Telenor ASA (Telenor), a leading Norwegian telecommunications company. As of February 2015, Telenor held a 42.6% stake in DTAC. TRIS Rating views that DTAC will continue to benefit from regulatory cost saving and be able to enter the new spectrum license auctions while maintaining financial strength. The ratings also take into consideration DTAC’s established brand equity, its extensive network coverage, and industry growth prospects with supportive regulatory developments. However, these strengths are partially offset by intensified competition in the wireless communications industry, and the large investment required to roll out network nationwide.
The “stable” outlook is based on the expectation that DTAC will continue to maintain its strong market position and deliver sound operating performance. DTAC is expected to continue to improve service quality, to strengthen the brand equity.
The credit ratings of DTAC could be under downward pressure if the debt to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio rises above 1.5 times over an extended period or DTAC's profitability deteriorated for a prolonged period of time due to aggressive competition.
DTAC’s very strong business profile reflects its established market position as the second-largest cellular phone service provider in Thailand. The company held 31% and 29% market shares in terms of subscribers and service revenues. DTAC's total subscribers rose from 27.9 million at the end of 2013 to 28.4 million as of March 2015. DTAC generated revenue of Bt90,415 million in 2014, a 4.4% decrease from the previous year due mainly to the decline of voice revenue. For the first three months of 2015, the company reported Bt22,884 million in revenue, or a 2% year-on-year (y-o-y) growth. DTAC’s business strength is further supported by its established brand names "DTAC" and "Happy".
DTAC launched the 2100-megahertz (MHz) 3G (third generation) services in July 2013 and has provided 4G services since May 2014. At the end of March 2015, DTAC had about 23.5 million subscribers on its 3G and 4G LTE (long-term evolution) networks, or about 28% share in this segment. Going forward, DTAC will further develop 4G network nationwide, to support the strong growth in data services and strengthen its market position amid aggressive competition.
Service revenues (excluding interconnection charges or IC) of the Thai wireless telecommunications industry grew by 1% in 2014, and 3% y-o-y in the first quarter of 2015. Non-voice service has reported a strong revenue growth since 2010 and continued a growth of 27%-29% during 2014 through the first quarter of 2015. On the other hand, the revenue from voice service declined 11%-14% during the same period. Total service revenues are expected to grow moderately in 2015 as demand for data services remains strong. The LTE license auctions are expected to take place in late 2015, which will stimulate investment in the medium term. The industry prospects remain good with intensified competition. All mobile service providers will heavily develop 4G networks and promote the data services. The mobile number portability is widely effective and smartphone price is affordable.
DTAC’s service revenues, excluding IC, was Bt68,275 million in 2014 and Bt16,768 million for the first three months of 2015. During 2015-2017, TRIS Rating’s base case expects DTAC’s service revenues to grow at 5% per annum on average. The solid increases in data service revenue should be able to outpace the decline in voice service revenue. DTAC’s operating margin (operating income before depreciation and amortization as a percentage of sales) was 34.1% in 2014 and 32.2% for the first three months of 2015, compared with 31.3% in 2013. The margin improvement is minimal due to the fierce competition and price subsidy on devices. DTAC continues to bear regulatory cost on both 2G concession and 3G license networks as DTAC can utilize the concession spectrum until 2018. DTAC's regulatory costs, as a percentage of service revenue excluding IC, were lower from 31% in 2013, to 23% in 2014, and 18% for the first three months of 2015. During 2015-2017, TRIS Rating’s base case expects DTAC’s operating margin will gradually improve to 35%-40%. The improvement reflects further cost saving from larger 3G subscriber base although partly offset by increasing marketing expenditures.
Since 2012, DTAC has maintained total debt slightly over Bt30,000 million and the debt to capitalization ratio of around 50%. The company generated funds from operations (FFO) of Bt26,328 million in 2014, increasing from Bt21,875 million in 2012. FFO to total debt ratio increased from 72% in 2012 to around 80% during 2013 through the first quarter of 2015.
During 2015-2017, TRIS Rating expects DTAC will spend capital investment of Bt55,000 million in total. DTAC plans to continue dividend payout ratio of at least 80% of net profits. The company’s FFO is expected to increase to approximately Bt28,000-Bt35,000 million per annum. Therefore, DTAC’s debt to capitalization ratio will be maintained at about 50%. For potential new licenses of the 1800-MHz and 900-MHz spectrums, TRIS Rating believes that DTAC’s financial strength can accommodate the investment in case the license cost and payment scheme are similar to the previous auction. DTAC’s strong relationships with financial institutions are expected to provide the company with a sufficient financial flexibility for its future requirements.
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