TRIS Rating has affirmed the company rating and senior unsecured debenture rating of Total Access Communication PLC (DTAC) at “AA+” with “stable” outlook. The ratings reflect DTAC’s strong market position as the second-largest cellular phone service provider in Thailand. The credit ratings also take into consideration DTAC’s sizable cash flow and sufficient liquidity. The ratings are partly enhanced by the support DTAC receives from Telenor ASA (Telenor). However, these strengths are partially offset by the intense competition in wireless telecommunication services and the large capital expenditures required for network investment.
The “stable” outlook is based on the expectation that DTAC will maintain its market position and keep improving its service quality, in order to strengthen its brand.
DTAC's potential for rating upgrade is likely to limit over the next 12-18 months, given the intense competitive pressure. Nevertheless, TRIS Rating would consider a faster and sustained growth and strong profitability improvement as positive factors for the ratings. The large gain in market share or a shift of competitive position with sustained healthy financial profile will also be the rating uplift. The ratings could be downgraded if net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) consistently remains over 1.5 times. Worsening competitive position or the significantly deteriorated financial profile over the long period will also negatively impact its credit profile.
DTAC was incorporated in 1989 and was listed on the Stock Exchange of Thailand (SET) in 2007. Telenor, a leading Norwegian telecommunications company, held 42.6% of DTAC's shares as of March 2016. DTAC had 25.5 million subscribers at the end of March 2016. The company generated Bt87.8 billion in revenue and about Bt28 billion of EBITDA in 2015. For the first three months of 2016, DTAC reported Bt21.7 billion in revenue.
The ratings reflect DTAC’s strong market position as the second-largest cellular phone service provider in Thailand, with about a 30% share of industry-wide subscribers. DTAC’s business strength is underpinned by its brand equity. DTAC provides cellular phone service with its well-known brand names "DTAC" and "Happy", and its wide network coverage. DTAC operates on 850 megahertz (MHz), 1800-MHz, and 2.1 gigahertz (GHz) frequency bands. DTAC has looked for growth by diversifying revenue away from the saturating voice service. In common with its competitors, DTAC has moved to a greater emphasis on data service. The fast-growing demand for mobile data has urged operators to secure multi-year spectrum licenses, as evidenced by the highly competitive auctions for 1800-MHz and 900-MHz licenses which eventually resulted in much higher-than-expected license prices. Although DTAC did not acquire any new spectrum license during the recent auctions, TRIS Rating is of the view that DTAC remains competitive. The company holds the 50 MHz spectrum bandwidth until 2018, which is apparently adequate to serve its subscribers. However, DTAC is forced to participate in the forthcoming auction to ensure ample spectrum. DTAC is hence susceptible to risks associated with future spectrum acquiring, including plausible costly license price, uncertain timeline of next auction, and regulatory spectrum allocation plan.
The ratings also incorporate DTAC’s financial strength, which is characterized by sizable cash flow, sound financial flexibility, and ample liquidity. Funds from operations (FFO) were Bt24.8 billion in 2015, compared with Bt26.3 billion in 2014. The FFO to total debt ratio was ample, staying at about 50% during 2015 through the first three months of 2016. Total debt rose from Bt33.7 billion in 2014 to Bt49 billion at the end of March 2016 because dtac TriNet Co., Ltd. (DTN), DTAC's wholly-owned subsidiary, issued Bt15 billion in new debentures in 2015. The debentures were issued for the license auctions and investments in the network. The debt to capitalization ratio climbed from 50.8% in 2014 to 64.3% as of March 2016. However, DTAC had Bt17 billion in cash on hand at the end of March 2016.
DTAC’s credit ratings are strengthened by the support DTAC receives from Telenor, in the areas of managerial assistance and technological know-how support. DTAC is considered significant to Telenor in light of its earnings contribution. DTAC is recognized as top earner in the Telenor Group outside Norway. In recognition of this, TRIS Rating expects that Telenor will also support DTAC financially in time of needs.
Conversely, the ratings are partially offset by the intense competition in wireless telecommunication services. Given saturated and price-sensitive market, all mobile service providers will use more aggressive pricing strategies and marketing activities in an effort to maintain their subscriber bases and defend their market shares. Further, the ratings are constrained by the large capital expenditures required for network investment. Demand for mobile data has heightened, chiefly caused by technology changes impacting consumer behavior and more affordable handsets. The mobile service providers need to invest in coverage for 4G (fourth generation) service which require huge capital expenditures. DTAC has placed its 4G network expansion at the forefront of its business strategy. TRIS Rating expects DTAC to make capital investments of Bt70 billion in total during 2016-2018, excluding the new license costs, to rollout its 4G network nationwide. The quality of the expanded network is supposed to create good user experiences and perceptions.
During 2016-2018, TRIS Rating expects a flat to low single-digit growth in DTAC's service revenue, excluding the interconnection charge or IC. The growth in service revenue will be driven by higher 4G data usage and strong demand for data traffic. Revenue from data services is expected to grow and offset the decline in voice services revenue. DTAC’s operating margin, despite a benefit from lower regulatory cost, will stay under pressure because of heightened competition. DTAC has changed its dividend payout policy. Instead of paying out at least 80% of net profit, DTAC will now payout at least 50% on semi-annual basis. The revised dividend policy illustrates the preparations DTAC is making for its new investments, driven by intense competition. During 2016-2018, FFO is expected to range from Bt24-Bt28 billion per annum, and DTAC's liquidity profile is expected to remain ample. The debt to capitalization ratio is expected to stay at the current level. The net debt to EBITDA ratio is projected to stay below 1.5 times. DTAC has a strong financial profile and lacks the financial burden from the costly 900-MHz spectrum payments. As a result, DTAC is expected to strengthen its network quality, counter competition, and defend its market position. However, the funds needed to pay for a license at future spectrum auctions could push DTAC's leverage ratio higher.
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