True Corporation

True Corporation Plc (TRUE) 

 

Investment thesis    

Although TRUE has gained the largest bandwidth (low-band and high-band spectrums) in hand, which will offer better competitive advantage and pose a threat to its competitors, we think that such unreasonably expensive acquisitions will be a financial drag on the firm in the next five years. We expect it to be forced to reverse into deeper net losses, several capital increases and the absence of any dividend payments, at least in that period. Our SELL rating stands. We recommend switching to ADVANC and INTUCH, which still offer 7% dividend yields. 

TRUE currently holds the most bandwidth 

Because TRUE won licenses for 900MHz and 1800MHz in 4Q15, it is the only operator who occupies bandwidth totaling 55MHz in hand—850MHz (15MHz), 900MHz (10MHz), 1800MHz (15MHz) and 2100MHz (15MHz). TRUE will allocate at least 40MHz of the 55MHz to provide 4G services. Though DTAC has 70MHz total bandwidth in hand, it can use only 50MHz and 55MHz, which can be utilized until its two concessions expire in Sep 2018. To provide quality “4G Advance” services, we think that operators will need at least 40MHz in bandwidth. 

Long-term targets—challenge ADVANC and usurp DTAC 

With both low-band frequencies (coverage) and high-band frequencies (capacity), we believe that it is a long-term benefit for the firm to gain subscriber market share by accommodating all market segments, especially the prepaid segment in rural areas where the 900MHz spectrum has the competitive advantages of wider coverage and lower CAPEX. The 900MHz bandwidth can save up to Bt45bn CAPEX to reach 97% population coverage. It is a long-term threat to ADVANC and DTAC, as they will lose upcountry market share to TRUE. 

Because it wants to challenge ADVANC’s position and aims to secure the No. 2 position to replace DTAC in the long term, we believe that it will continue to make unreasonably high bids at the next auctions for the 2600MHz (in 1H17) and 1800MHz (in 2H18) licenses, underpinned by strong partnership with CP Group and China  Mobile. We believe that its revenue market share target of 30% within three years with the 900MHz spectrum in hand looks achievable.  

Capital increases expected in FY17-19, without a dividend payout  

If its debt-to-equity (D/E) ratio exceeds 2x, it is likely that there will be no dividend payout. We expect its D/E ratio to reach 1.73x at YE18 before jumping to 3.32x at YE19, led by the huge debt drawdown to pay the last 900MHz license fee of Bt60bn in FY19. Although its D/E ratio remains well below 2x during FY16-18, we still expect the firm to raise new capital during FY17-19 to deleverage its capital structure to take on new debts for the next auctions of the 2600MHz (in 1H17) and 1800MHz (in 2H18) spectrums and expect no dividends given the heavier 4G-related CAPEX in the next five years. It targets a Bt55bn 4G CAPEX (excluding 4G license fee) during FY16-18, close to our Bt52bn estimate, backed by relaxed vendor financing with grace periods, syndicated loans, CFO and from a future divestment in DIF.