Intouch Holdings
Does INTUCH spell ADVANC? Outperform
Intouch Holdings Plc (INTUCH)
We initiate coverage on INTUCH with an Outperform rating and a 12-month target
price of Bt86, based on a net asset value (NAV) approach. We like INTUCH for three
reasons. First, it is an indirect play on ADVANC – investors can invest in ADVANC at a
22% discount via INTUCH. Second, its growing exposure to content may provide
upside to valuations and supports INTUCH’s emergence as a convergence play in the
medium to long term. Third, its strong track record of sustainable dividend payments
provides support for the share price and the current yield is attractive at 6.7%. We
expect INTUCH to show a net profit CAGR of 16% in 2014-16E, which would feed into
further growth of the dividend stream. We prefer INTUCH with its TSR of 28.7% to
ADVANC on a TSR of 24.0%.
An inexpensive way to capture ADVANC’s yield
ADVANC is the key investment of INTUCH, accounting for 94% of INTUCH’s NAV and
contributing 98% to INTUCH’s dividend income in 2015E. This overshadows its
investment in THCOM, a satellite operator with its own growth story but which is less
material to INTUCH’s NAV and bottom line. As we expect ADVANC to generate a net
profit CAGR of 13% in 2014-16E, it will likely remain the dominant asset in INTUCH’s
portfolio. INTUCH’s share price is trading at a 22% discount to its NAV, which is in line
with the adjusted average discount to NAV of 20% since 1995. While we believe the
discount actually reflects the corporate tax INTUCH would pay if it liquidated its
assets, INTUCH said it has no intention to sell its investments. Therefore, we see
INTUCH as a discounted way to gain exposure to ADVANC and capture a better
dividend yield.
Exposure to content growth
Management has embarked on an investment strategy to build a strong footprint in
the content business, which we believe is the right direction. We expect value creation
to be modest in the initial years, but as critical mass is built in content it should
transform INTUCH into a convergence play and add value to ADVANC with access to
differentiated mobile services. We believe that the key focus will be on Thai content in
various forms including traditional content (TV programs, music and movies) and new
content (digital or user-generated content). Investment should be composed of mostly
small projects and digital TV. We have not factored content investment into our model
at this stage as invested capital in the sector remains low. However we like the
direction the company is taking in this area and believe INTUCH has the balance sheet
strength and management capability to execute this strategy effectively.
Great for the income stream
Since 2008, all dividends INTUCH has received from subsidiaries and associates have
been passed through to shareholders. The dividend payout ratio has been maintained
at 100% since 2010 and this is likely to continue through 2014-16E. We expect
ADVANC, which remains the key contributor to dividend income, to achieve a net
profit CAGR of 13% in 2014-16E and maintain a 100% dividend payout policy itself.
For INTUCH, this will support our expected DPS CAGR of 16% in 2014-16E.
