TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to Bt23,000 million in senior unsecured debentures of True Move H Universal Communication Co., Ltd. (TUC). At the same time, TRIS Rating has affirmed the company rating and the ratings of the outstanding senior unsecured debentures of TUC at “BBB+”. The outlook remains “stable”. The proceeds from the new debentures will be used to repay outstanding debt, to fund planned investments, and for working capital needs.
The ratings reflect TUC's status as the third-largest mobile phone service provider in Thailand, and its improving market position. The ratings also take into consideration TUC's status as a core business unit under the TRUE Corporation PLC (TRUE; rated "BBB+/Stable") with ongoing operational and financial support from TRUE. However, these strengths are partially offset by the intense competition in the mobile phone industry and a weakened financial profile from the high-priced mobile spectrums acquired and the substantial investment required to roll out its network nationwide.
The “stable” outlook is based on the expectation that TUC will maintain its leading market position in the data service segment and deliver improved operating performance despite aggressive competition. TUC's status as a core business within the TRUE Group is expected to remain unchanged. Any change to TRUE's credit rating will impact TUC's rating accordingly. TUC's rating upside could emerge if TUC considerably gains higher market share and strengthens profitability without hurting the balance sheet. TUC's ratings could be downgraded if the company is unable to monetize its new investment such that operating performance notably weaker than TRIS Rating's expectation.
Several past legal uncertainties, such as access charges or excise tax issues, will persist and will not be resolved any time soon. However, the probability of seeing material adverse legal consequences in the near term is believed to be subsided to some extent. The ratings could be under downward pressure if the legal outcomes significantly affect TUC's financial profile.
Incorporated in 2010, TUC is wholly owned by TRUE, an integrated telecom company in Thailand which offers fixed-line broadband Internet, mobile phone, and pay-TV services. TUC's credit quality is closely tied with TRUE's credit profile, considering its strategic importance and its significant contribution to the TRUE Group. For the first half of 2016, TUC contributed about 73% of TRUE's revenues and 81% of EBITDA (earnings before interest, taxes, depreciation, and amortization). TRUE is fully involved in TUC's operations, including nominating directors to the board and designating the top management. TRUE has provided financial support to TUC, in the form of capital injections, worth about Bt85 billion during 2011-2014. In June 2016, TRUE injected Bt60 billion into TUC to support the acquisitions of the 1800-MHz and 900-MHz spectrums. The support from TRUE enhances TUC's competitive position and is considered a positive credit factor for TUC's ratings.
TUC provides wireless telecommunication services in the 850-megahertz (MHz) spectrum under a wholesale-resale agreement with CAT Telecom PLC (CAT) and three spectrums under licenses from the National Broadcasting and Telecommunications Commission (NBTC), including the 2.1 gigahertz (GHz) spectrum. Driven by the fast-growing demand for mobile data, TUC acquired the 1800-MHz spectrum under an 18-year license, and the 900-MHz spectrum under a 15-year license. With the widest viable spectrums in its possession, TUC can use the broad range of spectrums to serve the soaring demand for data services.
TUC's competitive position has improved continuously, driven by its strategy to be a first mover for 3G (third generation) and 4G LTE (long term evolution) services to serve robust growth in demand for data usage. During the past five years, TUC's service revenue (excluding interconnection charges or IC) outpaced the growth rate of the Thai wireless telecommunications industry. TUC's service revenue has grown by an average of 14% per annum over the past five years, compared with industry growth averaging 7% per annum. At the end of June 2016, TUC had 22.8% market share based on industry-wide service revenue. TUC will roll out 4G technology nationwide, the centerpiece of the company’s strategy to attract subscribers. TUC targets a 33% service revenue market share by the end of 2018.
Looking ahead, TUC’s business profile hinges on its ability to acquire new subscribers and increase operating cash flow. However, TUC’s growth ambitions will run up against the intense competition in the Thai mobile phone industry. All operators will use more aggressive pricing strategies and marketing activities in an effort to attract new subscribers and safeguard their market shares. The level of competition will depress profits and will be a rating constraint in the years ahead.
The new spectrums TUC's recently acquired support its growth plans and ensure an ample amount of spectrum over a multi-year period. However, the hefty cost of the spectrums weighs on TUC's financial position, leaving TUC with a heavy debt load in the medium term. TUC has pledged to pay a total of Bt116 billion for both spectrum licenses, lifting debt (including operating lease obligations and accrued license fees) from Bt30.6 billion in 2014 to Bt162.5 billion at the end of June 2016. Adding to that, TUC budgets expenditures for network expansions for a total of Bt51.6 billion through 2021. In response, TRUE raised Bt60 billion in new equity capital and injected into TUC in June. TUC plans to use Bt40 billion of the new capital to repay outstanding debts. The remainder will be reserved for the network rollout. The capital injection supports TUC’s capital structure. The ratio of adjusted debt to capitalization improved from 79.13% at the end of March 2016 to 60.64% at the end of June 2016. Adjusted funds from operations (FFO) to total debt was 7.46% (annualized, from the trailing 12 months) for the first six months of 2016.
TRIS Rating expects TUC to effectively monetize its investment without significantly hurting its financial profile. Under TRIS Rating’s base-case scenario, TUC service revenue is forecasted to grow by 10%-20% annually during 2016-2018. Top line revenue is expected to be in the range of Bt94-Bt106.7 billion during the same period. However, the ambitious growth plans are fueled by hefty marketing and promotion expenses which will pressure profits. The operating margin (operating income before depreciation and amortization as a percentage of sales) is expected to range from 12%-18% per annum. The FFO will range between Bt8-Bt17 billion annually during 2016-2018. The ratio of FFO to total debt is expected to range between 7%-17% during 2016-2018.
TUC's liquidity profile is acceptable over the next 12-15 months, taking into account expected uses and sources of funds. TUC has debts of Bt39.4 billion coming due from September 2016 to the end of 2017. TRIS Rating estimates TUC's capital expenditures of approximately Bt22-Bt28 billion over the same period. Sources of funds are expected FFO of at least Bt14 billion plus Bt23 billion from the new debentures. TRIS Rating also estimates that TUC's cash and cash equivalents at the end of September 2016 would be approximately Bt35 billion. However, if capital expenditures are higher than expected, TUC may need additional borrowings to allow headroom for financial flexibility. If the ratio of debt to capitalization stays over 65% on a sustained basis, the ratings could also be under downward pressure.
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