Total Access Communication

Total Access Communication Plc (DTAC) 

Investment thesis

We believe that DTAC’s earnings will recover strongly in 2H15, following its improved 3G/4G network quality from an additional 6.5k in base-station rollouts during 4Q14-1Q15. Due to the delayed earnings recovery from 1H15 to 2H15, we have cut our FY15 earnings forecast 16% (to Bt11.2bn). Our YE15 target price has declined 7% (to Bt112). Our BUY rating stands, premised on 2H15 earnings recovery, an attractive dividend yield of 6% and the scope for upside from the network infrastructure sharing model with CAT and/or private operators.

4Q14 results recap—disappointing results but higher dividend  

DTAC saw net profit of Bt1.89bn for 4Q14, up 2% YoY but down 27% QoQ. Stripping out extra items in 4Q14—a Bt3m FX loss and a Bt132m reversal of a deferred tax asset expense—core profit will be Bt1.76bn, down 42% YoY and 31% QoQ. Net and core earnings were 21% and 28%, respectively, short of our model, due to lower service income and higher marketing expenses, than we had assumed. It booked the reversal of impairment of concession assets (Bt1bn) and the deferred tax asset expense (Bt2.1bn) on the unconsolidated income statement, which resulted in unusually high 4Q14 DPS of Bt2.34/share (or a 100% payout ratio on unconsolidated EPS). Details are on page 4. 

FY15 operational guidance  

The firm guided that a 1-3% service income (excluding IC) growth rate will ensue for FY15, driven by GDP growth of 3% for FY15 and lasting strong data growth. The EBITDA margin for FY15 is expected to be 34-35%, close to FY14, due to the continued handset subsidy (despite further regulatory cost saving in FY15). Its CAPEX guidance for FY15 is a minimum of Bt14bn, using the network infrastructure sharing/renting model. However, it may need to revise the CAPEX guidance up significantly if the sharing/renting model fails to materialize. With regard to its additional 6.5k 3G/4G base stations in Bangkok and major cities, it has already completed installing 2.7k stations in 4Q14 with the remaining 3.8k stations expected in 1Q15.  

Key takeaways from conference call 

The company’s CFO guides that EBITDA margin in FY15 will rise YoY, excluding the handset business. Despite current disputes over asset ownership, the firm is exploring the network infrastructure sharing/renting model with CAT and/or other mobile operators for the use of 2G network after its concession expires, to reduce CAPEX. That model is expected to be concluded in the next 6-8 months. The CFO didn’t expect the infrastructure sharing model to have an impact on the FY15 margin but rather suggested that the longer term margin would. The CFO expects to bring down the high gearing ratio caused by high the dividend payment in 4Q14 to a normalized level soon.