TRIS Rating places the company rating of ?AA? on Total Access Communication PLC (DTAC) on CreditAlert with a ?negative? implication, as the planned merger between DTAC and True Corporation PLC (TRUE) makes significant progress.
The ?negative? implication reflects our expectation that the financial profile of the combined entity (NEWCO) could be at a weaker level relative to that of DTAC. Moreover, the one-notch rating uplift to DTAC?s standalone credit profile (SACP) of ?aa-?, would not be applicable for NEWCO. The uplift is based on our view of DTAC as a strategically important subsidiary of Telenor. Given Telenor?s expected equity interest of approximately 27% in NEWCO which implies lack of majority control, NEWCO would not be viewed as a strategically important subsidiary of Telenor.
DTAC and TRUE have recently obtained approvals from their respective shareholders. The merger is now pending relevant regulatory approvals and other customary closing conditions. We view the combined entity will have a stronger business profile, relative to the separate business profile of DTAC or TRUE. We expect the merger to bring in synergies, significantly increase business scale, enhance competitiveness, and improve cost efficiency. Numerically, the merger would make NEWCO commanding the largest market share in mobile phone service revenue, combining TRUE?s 32% share and DTAC?s 22% share as of March 2022.
Despite the comparative strength in business profile, we expect NEWCO to have a weaker financial profile relative to that of DTAC. We estimate the ratio of net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of NEWCO to be 5-5.5 times post-merger, significantly higher than that of DTAC at 3.8 times as of March 2022.
We hold our view on the challenges of obtaining the required regulatory approval from the National Broadcasting and Telecommunications Commission (NBTC), as a significant risk to the prospective merger. The extension in timelines for completion of merger remains a possibility. TRIS Rating will remove the CreditAlert once the merger is completed and the impact of the merger on DTAC?s creditworthiness has been thoroughly analyzed. Both parties expect the merger to close in the fourth quarter of 2022. We will closely monitor developments related to the merger and take appropriate rating actions accordingly.
The rating continues to reflect DTAC?s position as the third largest wireless telecommunications service provider in Thailand and its adequate spectrum portfolio. The rating also takes into consideration DTAC?s sound cash generation and liquidity position. Moreover, the rating incorporates strong parental support from Telenor. To the contrary, the rating is held back by the stiff competition and the hefty investments required for spectrum licenses and network rollouts.
KEY RATING CONSIDERATIONS
Third largest mobile phone service provider
DTAC remains the third largest wireless telecommunications service provider in Thailand. The company, through its wholly owned subsidiary, dtac TriNet Co., Ltd. (DTN), holds licenses to use a range of radio frequencies for its mobile phone network services, including low frequencies: 700 megahertz (MHz) and 900 MHz, mid-range frequencies: 1800 MHz, 2100 MHz, and 2300 MHz (in partnership with National Telecom PLC (NT)), and high frequencies: 26 gigahertz (GHz).
We view the current pool of spectrum licenses is adequate for DTAC to broaden its customer base. The 700-MHz frequency can cover indoor and remote areas across all regions while the 26-GHz frequency provides a wide range of 5G service applications that require most instantaneous delivery of large amount of data. DTAC has managed to increase level of customer?s confidence by accelerating low-frequency network rollouts (700 MHz for 4G/5G and 900 MHz for 2G/3G). In addition, DTAC has recently started to offer services that meet the needs of consumers, including non-DTAC users, such as cybersecurity, gaming SIM cards and payments. This strategy is to be proven in the longer term.
As of March 2021, DTAC held a market share of about 20% of all subscribers in Thailand. DTAC?s service revenue, excluding interconnection charges (IC), represented about 22% of industry-wide revenue.
Regaining subscribers remains a tough challenge
DTAC?s subscribers have fallen below 20 million. However, we see a recent pick-up in numbers of subscribers. We view the government?s relaxation on border-crossing restrictive measures, as a potential boost for DTAC?s subscriber numbers since tourists and migrant workers customarily constitute a significant part of the company?s customer base. That said, we hold our view that DTAC?s efforts to regain market shares remain extremely challenging, given the fierce market competition.
Fiercely competitive mobile phone services
The Thai wireless communications industry has endured fallouts from successive waves of the Coronavirus Disease 2019 (COVID-19) pandemic over the past two years. The prolonged pandemic has resulted in lower consumer spending, and intensifying competition especially in the prepaid segment. Mobile phone operators keep rolling out new services and competitive promotions to poach customers from rivals. Although the total number of subscribers recovered in 2021, the average revenue per user (ARPU) continued to decline since the beginning of the pandemic. As a result, total market value declined by 1.3% to THB253 billion, compared with the average growth of 2% per annum during 2018-2019. For the first quarter of 2022, market value continued to contract by 1.8% year-on-year (y-o-y).
Sound cash generation
The rating is largely supported by DTAC?s sound cash generation. DTAC?s EBITDA has remained robust over the past five years, in the range of THB29-THB31 billion per annum. Thanks to the company?s cost efficiency, DTAC has been able to lower some expenses during periods of declining service revenues (voice and data).
In our base-case forecast, we put aside the planned merger and merely consider DTAC?s business as usual. In anticipation of the post-COVID economic recovery, we expect DTAC?s operating revenue to increase by around 1%-2% per year, resulting in EBITDA of THB30?THB32 billion per year over the next three years.
Support from Telenor
Telenor has been the major shareholder of DTAC since 2011. As of March 2022, Telenor held a 46.7% stake in DTAC. Telenor supports DTAC in overall management, technical know-how and supplier negotiation. DTAC?s cost optimization during the past three years has been partly supported by Telenor.
In 2021, DTAC contributed approximately 20% and 16% of Telenor?s revenue and EBITDA, respectively. DTAC ranked no. 2 in contribution to Telenor?s revenue and EBITDA among eight markets for the past five years. Based on the assessment on DTAC?s importance to Telenor, we view DTAC as a strategically important subsidiary of Telenor and incorporate a one-notch rating uplift from DTAC?s SACP. The rating uplift reflects potential extraordinary support from Telenor in times of stress. Until the completion of the prospective merger, we expect the degree of support from Telenor will remain unchanged.
Lower leverage anticipated
We expect DTAC?s leverage to improve during the forecast period. The company?s adjusted debt to EBITDA ratio is projected to gradually improve to around 3 times in 2022-2024 from around 4 times during 2020-2021. Cash flow from operations should be sufficient to cover capital expenditures for network rollouts and license fee payments totaling THB20 billion a year and debt repayments. As a result, net interest-bearing debt is expected to decline from THB110 billion as of March 2022 to THB81 billion in 2024.
Ample liquidity
We assess DTAC to have ample liquidity. As of March 2022, its sources of funds comprised cash on hand of THB5.6 billion and undrawn committed credit facilities of THB18.5 billion. Funds from operations over the next 12 months are expected to be around THB27 billion. These sources of funds should be sufficient to cover long-term debt repayment obligations, license fee payments, and investment needs over the next 12 months.
BASE-CASE ASSUMPTIONS
? Service revenues, excluding the IC, to gradually grow by 1%-2% in 2022-2024.
? EBITDA margin to stay at around 38% during the next three years.
? Total capital spending to be approximately THB18-THB20 billion per annum.
? No additional spectrum to be acquired.
? Dividend payout ratio of 100%.
COMPANY OVERVIEW
DTAC was incorporated in 1989 and listed on the Stock Exchange of Thailand (SET) in 2007. Telenor, a leading Norwegian telecommunications company, directly held 46.7% of DTAC's shares as of March 2022.
In 1989, DTAC started to provide wireless telecommunications services in the 850-MHz and 1800-MHz frequency bands under a 27-year BTO (Build-Transfer-Operate) concession.
DTAC, through DTN, its wholly-owned subsidiary, launched 3G services in July 2013. The company?s 3G and 4G services are operated under a 15-year 2.1-GHz spectrum license granted by NBTC in October 2012. In 2018, DTAC entered into an agreement with NT to provide wireless broadband 4G services on the 2.3-GHz spectrum. Under the agreement, DTAC can use up to 60% of the total network capacity.
In September 2018, the concessions expired. In August and October 2018, DTN won two new licenses for the 900-MHz and 1800-MHz spectrum bands, granted by NBTC. In June 2019, DTN was allocated a 700-MHz license.
DTN was awarded the 26-GHz spectrum, in preparation for 5G, in February 2020 and has started to operate the frequency band of 700 MHz since December 2020. For 900 MHz, DTAC secured the licenses since 2018. DTAC switched to operate on 900 MHz from 850 MHz in 2021.
Given the COVID-hit market and intense competition, DTAC?s services revenue (voice and data) successively declined by 3%-5% per year over the past two years. DTAC?s overall ARPU declined from approximately THB260 per month in the fourth quarter of 2019 to THB230 per month in the first quarter of 2022. As of 31 March 2022, DTAC had 19.9 million subscribers.
RELATED CRITERIA
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
- Group Rating Methodology, 13 January 2021
- Rating Methodology ? Corporate, 26 July 2019
NOTE FOR ?CreditAlert?
?CreditAlert?, as part of TRIS Rating's monitoring process as a public warning when there is insufficient information to fully assess and reconsider a debt instrument's current rating or when significant events have occurred that may affect the company's rating already assigned by TRIS Rating. Credit Alert designations may be "positive" or "negative" or "developing", depending on the likely impact of a particular situation. The existing rating continues unchanged for the present. Monitoring is done until the debt instrument matures, or the company's rating contract expires.
Total Access Communication PLC (DTAC)
Company Rating: AA
CreditAlert: Negative