Total Access Communication

Total Access Communication Plc (DTAC)

Investment thesis: We think that DTAC’s recent share price retreat is due to investor concerns that its August 28 network failure might make for diminished consumer perceptions about its network quality; the churn rate might rise. We recommend overlooking this issue—a one-time hit—and instead focusing on 3G auctioning, which will start on Oct 16. Despite the network quality hiccup, our BUY rating stands, premised on DTAC having the greatest scope for bottom-line upside from a 3G license and a 6% dividend yield.
Negligible financial impact from network outage: The firm guided that the effective revenue loss resulting from the August 28 network failure will be less than for the Dec 21 outage (Bt135m per day). The Aug 28 compensation—100 free post-paid minutes and 80 free pre-paid minutes on top of customers’ existing bucket plans—will only apply to subs that call in to claim the minutes between August 29 and Sept 14. Moreover, the free minutes will not be activated if customers use less than the maximum number of minutes in their existing subscriptions. We estimate the total damage from the Aug 28 network outage at less than Bt100m (including a Bt10m NBTC fine).
Rising churns in Sept and 4Q12? There is some risk of a surge in churn and a decline in net additions during Sept and 4Q12 as a result of the network outage. Note that following the Dec 2011 network outage, net adds took six months to normalize. 
Estimate a 3Q12 profit slippage: We estimate a Bt2.75bn net profit for 3Q12, down by 11% YoY and 3% QoQ. The YoY decline is attributable to higher network OPEX, a jump in interest expenses and a higher revenue-sharing obligation of 30% (effective Sept 16, 2011). The QoQ profit dip is due to higher network OPEX, revenue losses resulting from the Aug 28 network outage and lower handset sales. Net adds and voice revenue recovered slightly in July-Aug, but they will probably retreat in Sept, due to the network failure. Despite estimated lost income as a result of the network outage, service revenue (excl. IC) will rise 5% YoY and 1% QoQ. Ex-network OPEX should be flattish QoQ.