Total Access Communication

Total Access Communication Plc (DTAC) 

Investment thesis

We believe the market has already anticipated and priced in weak DTAC earnings for 4Q14 and 1Q15. Looking ahead, profit will recover strongly YoY, starting 3Q15, led by improved network quality following Bt10bn CAPEX on 3G/4G buildout during 4Q14-1Q15. Despite further cuts to our FY14-15 earnings forecasts, our BUY rating stands, premised on an attractive FY15 yield of 7%, an expected FY15 profit recovery and scope for upside from winning 1800MHz and/or 900MHz bandwidth at planned NBTC auctions later this year and in 2016.      

Insights into 4Q14—YoY and QoQ core earnings drops 

We estimate a Bt2.40bn bottom-line for 4Q14, up 29% YoY but down 7% QoQ. Stripping out Bt984m in net extra expenses in 4Q13 and FX, core earnings would be Bt2.44bn, down by 19% YoY and 5% QoQ. The assumed YoY core profit fall is due to lower service revenue. The QoQ slippage was because of higher SG&A expenses, which should have outweighed the effect of seasonally higher revenue. The top-line remained weak in 4Q14; DTAC has yet to see an income boost from its ongoing 3G/4G network expansion rollout. Sales revenue is estimated to have risen by 6% YoY and 128% QoQ (led by sales of iPhone 6) and will post shallower negative GM (-6%) for the quarter. 

Regulatory costs will post a fall by 23% YoY and 3% QoQ on greater sub migration to 3G licensed bandwidth (from 71% at end-Sept to 73% at YE14) and 3G cell site expansion (from 11,280 sites at end-Sept to 11,800 sites). Depreciation and amortization expenses will have jumped by 21% YoY and 5% QoQ, network OPEX by 5% both YoY and QoQ. Marketing expenses will be posted flattish YoY (up 3% QoQ).

Further cuts to our FY14-15 core earnings forecasts 

Our model now indicates a 3% YoY decline but a 3% QoQ rise in service income (excl. IC) for 4Q14 (we previously assumed that 4Q14 service income would be flattish YoY) and a 2% YoY dip in service income (excl. IC) for FY14 (we previously assumed 1.2% YoY slippage). As such, our core earnings projections decline by 5% for FY14 to Bt11.29bn and by 7% for FY15 to Bt13.49bn. Hence, our DCF-based YE15 target price slips 5% to Bt120. Note that 4Q14 nonvoice income growth—up by 20% YoY and 7% QoQ—should have out-weighed the effect of a fall of 18% YoY and 4% QoQ in voice income. 

The YoY earnings recovery now not expected to build till 2H15 

The Bt10bn CAPEX for new 6.5k 3G/4G base stations (Bt4bn worth of which were installed in 4Q14) should improve network quality and scope for subscriber acquisition. But there will take time for consumers to become aware of the better coverage and data speeds. We expect DTAC’s earnings to post strong YoY growth, starting 3Q15.