High 3G capex forecasts lower brokers' outlooks

The market focus will now shift towards corporate strategies and financial guidance after 3G licensing. Investors may be disappointed by the mismatch between 3G costs and benefits at the early stages, which may hurt the profitability of Advanced Info Service (AIS), Total Access Communication (DTAC) and True, according to CIMB’s recent research.
The research said the brokerage noticed some discrepancies between its forecast and consensus estimates due to different assumptions for 3G costs and benefits. In addition, there are more spectrum auctions in the National Broadcasting and Telecommunications Commission’s pipeline – 1,800 megahertz in 2013, 900MHz in 2015 – which would prolong the capex cycle.
“We still hold a negative view on 3G operators on the back of possible legal suits, earnings disappointments and capex upsides,” it said. Citi Research reiterated that it had lowered its earnings estimates for both AIS and DTAC, reflecting assumptions on licence fees, elevated capex for 3G infrastructure, gradual subscriber migration to 3G, cost increases related to marketing and network maintenance, and initial 2G roaming expenses, as 3G networks would take time to be fully built out.
“We see 3G licensing as the key catalyst for AIS and DTAC, not just on cost savings but also to help companies better drive strong data growth. We suggest using any near-term profit-taking on news as potential entry points to the stock,” said the research note.
Citi Research said recently that it assumed migration of 35-40 per cent of cellular subscribers to 3G by 2013, rising to 70-75 per cent by 2015. The research also assumed that competition would be rational despite additional capacity given consumer willingness to spend more for the service, allowing for 6-per-cent average industry revenue compound annual growth rate (CAGR) for full-year 2012 through 2014. However, Citi Research expected earnings/margin dilution for the first two years and its previous 2G-only scenario, reflecting additional capital expenditures (and related depreciation), 3G licence amortisation, marketing, 2G roaming and network maintenance costs the companies will need to undertake.
“We assume Bt40 billion in 3G capex for AIS for full-year 2013-2015 and Bt30 billion for DTAC (ex-license fee of Bt15 billion),” said the research note. Citi Research said DTAC remained its preferred pick among Thai telecoms given the deep valuation discount compared with AIS, and similar yield potential.
“We think problems of network outages are behind it, while acceleration in network spending post-3G licensing should allow it to bridge network gaps with AIS,” it said.
“Cost savings on the 6-per-cent 3G licence fee will be greater than AIS’s given its higher concession-revenue share of 30 per cent versus AIS’s 24 per cent. DTAC thus benefits more from faster 3G migration.”