Total Access Communication

Total Access Communication (DTAC)

Q- 2 2013 profit lower than projected due to high 2G amortization
DTAC's 2Q13 net profit was B2.9bn, dropping 3% qoq, including extraordinary
income of B375m (reversing entries of free-call bonus for expired clients and net
impairment of IT system and Fx loss due to equipment import). If extraordinary
items are excluded, 2Q13 norm profit would be B2.56bn, falling 25.8% qoq, greatly
lower than our projection. Amortization from equipment license under the concession
was 20% higher than projected at B3bn, rising 24% qoq. Nationwide network swap
project that more investment fund was spent and delayed for nearly 6 months,
whereas amortization needed to be paid within the deal ( there is only 5 years left
,ending September 2018). Service expenses also rose 5.4% qoq, as expected, due
to expense on advertisement of new 3G. However, income growth rose 1.7& qoq as
client base expanded 2.3% qoq. Average revenue per units (ARPU) stayed
unchanged from 2Q13 despite low season, partially due to signal improved by
network development.

- New 3G to boost norm profit growth from 3Q13 on
Though DTAC's new 3G under new license since 23 July cost additional B500-600m
(new license's amortization, new network's depreciation, 2G base station rental to
install new network) in 3Q13, these services are likely to benefit from the following:
1) ARPU is likely to rise, as data service usage is projected to rise implicitly due to
efficiency of new 3G network. 2) Cost of revenue sharing would drop as clients are
transferred from previously 2G to 2.1GHz-frequency 3G, as the cost under new 3G
license is only 5.25% of the income, whereas the cost under 2G license was 30%. 3)
Marketing expenses would drop after the starting of new 3G. We project that, in
3Q13, DTAC would be able to transfer at least 3 million clients, who have requested
transfer (11% of total client base), from 2G to new 3G. Thus, 3Q13 norm profit is
projected to rise from 2Q13 (but 3Q13 net profit is projected to stay unchanged due
to extraordinary income in 2Q13). We believe that DTAC would be able to make net
profit the year’s highest in 4Q13 due to high season. Clients transferred to new 3G
will increase implicitly under our assumption that 20% of total client base would be
transferred to new 3G at end-2013 (5.6 million units). However, to reflect
amortization cost of 2G equipment that was higher than expected and lowered 1H13
net profit to only 43% of FY2013 earnings forecast, we reduce our FY 2013-2014
earnings forecasts to 7.5% and 8.7%. FY2013 net profit is projected to grow 14% to
B12.8bn, likely to rise continuously to 28.7% next year.

- FV may drop, but upside and div yield hikes 12.4%, accumulate
Though fair value is likely to drop, reflecting 2Q13 disappointing earnings result in
short term, we are confident that new 3G will boost profit in long run. 2013 fair
value under new forecast (DCF, 9.7% WACC, 0.5% terminal growth) at B128 has
only 8.5% upside but 3.9% dividend yield per year. XD will be marked to pay
B1.28/share dividend on 30 July. We reiterate “BUY” to accumulate when the price is
lower.