Total Access Communication

Total Access Communication Plc (DTAC)
Investment thesis: We took DTAC’s executives on a domestic non-deal roadshow on Aug 28. We felt that sentiment among the fund managers we met was broadly positive. There were a few minor concerns, such as the August 28 fifth network outage. We believe DTAC’s earnings bottomed out in 1H12 and will rebound in 3Q12 onward with a gradual voice revenue recovery. The firm is in the clear to bid for a 3G-2.1GHz license following its July shareholding restructuring. Our BUY rating stands, premised on: 1) the greatest scope for upside from a 3G license, 2) a 2H12 operational recovery and 3) a good yield of 6%.
The network swap (upgrade) completion by early 2013: Mr Petter Furberg, the CFO, said that the firm completed its network swap (upgrade) program in Bangkok in April and in the South (in July) and will finish its upgrade for the Eastern Central, Northeastern and Northern regions by early 2013. He claimed that the upgrade will improve network quality and speed. Mr Furberg also guided for higher voice and data revenues in 1Q13 onward as a result of the completion of the network swap (upgrade).
A gradual voice revenue recovery in 3Q12: Voice revenue will rise in 3Q12 with network swap completion in Bangkok and the South, the launches of new voice promotions and the effect of seasonality, according to the CFO. Churn rates declined in August, due to improved network quality, especially in Bangkok. Net adds will rise QoQ on improved network quality and seasonality.
3G-2.1GHz auctioning in Oct: The CFO expressed full confidence that 3G auctioning will commence in October. The firm plans to bid for 15MHz x2 of 2.1GHz bandwidth. CAPEX is estimated at Bt40bn for FY12-14, of which Bt8-9bn is allocated for FY12. DTAC plans to lease transmission and network access from the BTO network owned by CAT.

Outlook  
On August 28, we took DTAC executives on a domestic non-deal roadshow—Mr Petter Furberg, the CFO, Ms Chatsuda Santanond, Head of Investor Relations, Ms Kaewridthara Viriyawathana, AVP of Investor Relations. The key takeaways of the NDR are summarized below:
Broadly positive atmosphere from NDR: We felt that sentiment among the fund managers we met was broadly positive. They asked both about operational and regulatory issues. Operational questions concentrated on: 1) the recovery of voice revenue in 2H12, 2) the progress of the network swap (upgrade) program, 3) subscriber confidence in network quality, 4) the scope for a higher dividend payout and 5) the possibility of cost reductions in FY13.
Key regulatory questions included: 1) whether 3G auctioning will start by October, 2) DTAC’s view about the Bt4.5bn reserve price, 3) the network rollout of 3G on 2.1GHz, CAPEX and the envisaged speed of subscriber migration, 4) post-3G voice and data competition, 5) the foreign dominance issue, 6) interest in bidding for new bandwidth when it comes up for auction and 7) network leasing from CAT. A few concerns were voiced—the August 28 network outage (DTAC’s fifth in nine months), the acceleration in OPEX following the winning of a 3G license and the risk of 3G cost overruns.    
The network swap (upgrade) completion by early 2013: Mr Petter Furberg said that the firm completed its network swap (upgrade) program in Bangkok in April and in the South (in July) and will finish its upgrade for the Eastern Central, Northeastern and Northern regions by early 2013. He claimed the upgrade will improve network quality and speed. The CFO also guided for higher voice and data revenues in 1Q13 onward as a result of the completion of the network swap (upgrade).

A gradual voice revenue recovery in 3Q12: Mr Furberg guided that voice revenue will rise in 3Q12 with network swap completion in Bangkok and the South, the launches of new voice promotions and the effect of seasonality. Churn rates declined in August, due to improved network quality, especially in Bangkok. The second-quarter is normally the weakest, due to the large number of public holidays. Net adds will rise QoQ on improved network quality and seasonality.  
Fifth network outage on Aug 28: DTAC was subjected to another major service disruption on Aug 28, its fifth since Dec 2011. According to a company press release, MPLS Signaling Routers at a switching center in Rangsit malfunctioned, taking down the network in various parts of Thailand for more than an hour during the middle of the day. It apparently directly affected about 20% of the firm’s subscribers. We assume that DTAC will compensate affected subscribers by giving two days free calls. Applying the two-day compensation and the 20% negative impact on its total subscribers, we estimate a revenue loss of around Bt50m. Together with the NBTC’s estimated fines of Bt30m, total damages are estimated at roughly Bt80m, which will impact the 3Q12 bottom-line by about 2.7%, an insignificant financial impact.
Confident in 3G-2.1GHz auctioning in Oct: The CFO expressed full confidence that 3G auctioning will commence in October. The firm plans to bid for 15MHz x2 of 2.1GHz bandwidth. He said he considered the Bt4.5bn reserve price for a 5MHz x2 frequency block relatively expensive, given that more spectrum should be auctioned in the future (1800MHz bandwidth). Mr Furberg estimated FY12-14 CAPEX at Bt40bn, of which Bt8-9bn is allocated to FY12. DTAC plans to lease transmission and network access from the BTO network owned by CAT. The firm will halt its 3G on 850MHz buildout once it secures 2.1GHz licenses.

Not significant OPEX reduction in FY13: The CFO said network depreciation expenses for the planned 2.1GHz investment will ramp up in FY13-14, while amortization expenses for the existing 2G network will be flat during that period. Moreover, the extent of cost reductions from the network swap program will not be significant in FY13. He also doesn’t anticipate an immediate jump in EBITDA margin from regulatory cost savings during the first few years.
Clearance over the FD issue: Mr Furberg believes that DTAC now unambiguously complies with foreign dominance (FD) regulations, so is free to bid for 3G-2.1GHz licenses. NBTC rules state that to be recognized as a Thai company, so eligible to bid for 3G licenses: 1) foreign holdings voting rights must not exceed 50% of the total and 2) foreigners must not have majority control of voting rights at a shareholder meeting. As a result of the rejigging of the shareholding structure in July, the Bencharongkul family’s effective stake rose by 0.7% to 3% and Telenor’s direct and indirect holdings in DTAC increased by 1.3% to 62%. But Telenor’s headline shareholding is only 42.6%, which is what counts in legal terms.  
Will DTAC bid 2x 50MHz of 1800MHz in FY13? On Sept 15, 2013 the concessions of DPC (a subsidiary of ADVANC) and True Move will expire. Each firm has 12.6MHz x2 of 1800MHz bandwidth, which will be transferred to the NBTC. DTAC has offered to hand back 25MHz x2 of 1800MHz bandwidth to the NBTC. It would then have 50MHz x2 of bandwidth to auction to existing and new players in the cellular telecoms industry. However, there are some legal issues that might conceivably derail the NBTC’s plan to open up new spectrum for bidding. Mr Furberg declined to comment on the subject.

Not significant OPEX reduction in FY13: The CFO said network depreciation expenses for the planned 2.1GHz investment will ramp up in FY13-14, while amortization expenses for the existing 2G network will be flat during that period. Moreover, the extent of cost reductions from the network swap program will not be significant in FY13. He also doesn’t anticipate an immediate jump in EBITDA margin from regulatory cost savings during the first few years.
Clearance over the FD issue: Mr Furberg believes that DTAC now unambiguously complies with foreign dominance (FD) regulations, so is free to bid for 3G-2.1GHz licenses. NBTC rules state that to be recognized as a Thai company, so eligible to bid for 3G licenses: 1) foreign holdings voting rights must not exceed 50% of the total and 2) foreigners must not have majority control of voting rights at a shareholder meeting. As a result of the rejigging of the shareholding structure in July, the Bencharongkul family’s effective stake rose by 0.7% to 3% and Telenor’s direct and indirect holdings in DTAC increased by 1.3% to 62%. But Telenor’s headline shareholding is only 42.6%, which is what counts in legal terms.  
Will DTAC bid 2x 50MHz of 1800MHz in FY13? On Sept 15, 2013 the concessions of DPC (a subsidiary of ADVANC) and True Move will expire. Each firm has 12.6MHz x2 of 1800MHz bandwidth, which will be transferred to the NBTC. DTAC has offered to hand back 25MHz x2 of 1800MHz bandwidth to the NBTC. It would then have 50MHz x2 of bandwidth to auction to existing and new players in the cellular telecoms industry. However, there are some legal issues that might conceivably derail the NBTC’s plan to open up new spectrum for bidding. Mr Furberg declined to comment on the subject.
Data price war? The CFO said he is worried that aggressive handset promotion of TRUE Move-H will prolong but does not believe in a price war for voice subs.
Dividend payout guidance: The firm paid a 1H12 DPS of Bt2.27, a 100% dividend payout ratio on unconsolidated EPS (but a 92% payout ratio based on consolidated EPS). We believe that there is scope for a payout ratio of 100% of consolidated EPS in the future.

Recommendation and valuation
Our top Telecoms pick: DTAC’s earnings bottomed out in 1H12 and will rebound in 3Q12 onward with a gradual voice revenue recovery. Perceptions about its network quality have improved since its network swap (upgrade) program was completed in Bangkok in April. The firm is legally in the clear to bid for 3G-2.1GHz licenses following its July shareholding restructuring. Our BUY rating stands, premised on: 1) the greatest scope for upside from a 3G license of the telcos we cover, 2) a 2H12 operational recovery and 3) a good yield of 6%.