Advanced Info Service

Advanced info service Plc (ADVANC)   

Investment thesis

ADVANC remains our sector top pick in FY15, premised on its further improved network quality, the strong FY15 earnings growth led by domestic consumption recovery and scope for upside from possible business partnership with TOT on the shared telecoms assets and from the 4G bandwidth auctions in 2015-16. We have revised up our FY15 core profit forecast by 2% (to Bt42.2bn) and our YE15 target price by 4% (to Bt270) to factor in the upgraded service income forecast. BUY!  

4Q14 results recap—core profit slightly above estimate 

ADVANC posted a Bt9.12bn net profit for 4Q14, up 4% YoY and 2% QoQ. Stripping out four extra items in 4Q14—a Bt26m FX loss, a Bt66m write-off of obsolete equipment, an Bt11m asset impairment and a Bt664m deferred tax asset write-off—core earnings would be Bt9.89bn, up by 6% YoY and 10% QoQ. Net profit was 3% short of our estimate, thanks to the deferred tax asset write-off. Core profit exceeded our model by 3%, thanks to greater sales and service incomes and lower tax expenses than were assumed. Service revenue (excluding IC) rose by 4% YoY and 2% QoQ, led by nonvoice income, up by 41% YoY and 6% QoQ. 

FY15 operational guidance 

The firm targets a 3-4% increase in service revenue (excluding IC), a 10% rise in handset sales with a zero GM for FY15. The 3G device penetration is targeted at 70% by YE15 (up from 55% at YE14), which will lead to lower regulatory cost and hence the 100-200bps increase in EBITDA margin in FY15. This is despite higher network OPEX and marketing spends in FY15. Marketing expense will be 4% of total FY15 revenue. It targets a Bt40bn CAPEX (excluding 4G investment) in FY15 for 29k 3G base stations (including small cells) and the upgrade to “AIS Super WiFi” with the speed of 650Mbps. It targets 80k fixed broadband subscribers, with the first year CAPEX for fixed broadband at Bt1bn. 

Key takeaways from conference call 

The CFO expects separate 4G spectrum auctions starting with 1800MHz in 3Q15, which will then be followed by the 900MHz spectrum. He believes that TOT and CAT will not be key influences on the 4G auction delay because the government no longer wants to return 4G spectrums to both parties. 

It has not yet discussed with the NBTC or TOT on how to handle the remaining 3.5m subscribers on the 900MHz concession when it is due to expire in Sep 2015, but the likely scenario is that the NBTC would grant ADVANC a one-year temporary period for utilizing the 900MHz spectrum. It is in talks with TOT to set up an infrastructure fund. As for the issue of tower rentals with TOT, they remain in an uncertain state due to its disputes over the ownership of some towers with TOT. It also explores an opportunity to acquire existing fixed broadband players.