Fitch Revised DTAC's Outlook to Stable; Affirms at 'BBB'
The Outlook revision reflects the agency's expectation that the improvement in DTAC's earnings and financial leverage will be slower than we previously forecast. The benefit from regulatory cost savings is likely to be offset by the high marketing expenses and cost of services. Fitch now expects the company's operating EBITDAR margin to remain below 40% and its funds flow from operations (FFO)-adjusted net leverage to stay above 1.5x over the next three years, the level at which we may consider positive rating action.
KEY RATING DRIVERS
Slow Earnings Improvement: Fitch expects DTAC to face challenges amid intense competition, which could hinder improvement in earnings in 2H15 and 2016. Marketing expenses and handset subsidy costs will remain high in 2015 and 2016, which could offset a large part of the regulatory cost savings from moving to a licence scheme. Consequently, Fitch expects DTAC's operating EBITDAR margin to drop to 34%-35% in 2015 from 36% in 2014, compared with our previous expectation that EBITDAR margin would rise to around 40% in 2015.
Large Investment, Adequate Headroom: Sustained high capex and additional spectrum investment will lead to negative free cash flow (FCF), and an increase in net debt and financial leverage during 2015 and 2016. However, its large rating headroom should help the company to absorb the high investment. DTAC's FFO-adjusted net leverage was a healthy 1.5x at end-3Q15.
Strong Market Position: DTAC has a strong market position as Thailand's second-largest mobile phone operator, with around a 29% service revenue market share in 1H15. It continues to expand its network capacity to support strong growth in its non-voice segment and defend its market share.
Parent Support: We rate DTAC on a bottom-up basis under our Parent and Subsidiary Linkage criteria. It receives a one-notch uplift to reflect implied support from its parent, Telenor of Norway, which has strong board and management control. Consequently, any changes in Telenor's ownership or the links between the two would result in a reassessment of the level of support for DTAC from its parent.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for DTAC include:
- 2%-3% service revenue drop in 2015 and low-single-digit growth in 2016
- operating EBITDAR margin declines slightly to 35% in 2015 (2014: 36%) and gradually improves from 2016 onwards;
- THB18bn a year investment in network expansion in 2015 and 2016
- acquisition of new spectrum (900MHz and 1.8GHz) in 2015
- 100% dividend payout ratio.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- an increase in FFO-adjusted net leverage above 2.5x on a sustained basis (end-3Q15: 1.5x)
- unfavourable regulatory changes
- a weaker linkage between the company and its parent
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an improvement in operating EBITDAR margin to over 40% (9M15: 34.3%) and FFO-adjusted net leverage below 1.5x, both on a sustained basis
LIQUIDITY
Healthy Liquidity: Fitch views DTAC's liquidity as healthy, despite likely negative FCF in 2015 and 2016. Liquidity is supported by a high cash balance of THB21.5bn at end-3Q15, sturdy cash-flow generation, and the ability to access debt markets. DTAC had short-term debt of THB11.2bn at end-3Q15.
FULL LIST OF RATING ACTIONS
Total Access Communication Public Company Limited
Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook revised to Stable from Positive
Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook revised to Stable from Positive
National Long-Term Rating affirmed at 'AA(tha)'; Outlook revised to Stable from Positive
National Short-Term Rating at 'F1+(tha)'.
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