Total Access Communication

Total Access Communication Plc (DTAC)

Investment thesis
Our HOLD rating stands, based on the lack of visible operational gains progress in sight and expected loss of market share amid heightened competition in 2016. It will be difficult for DTAC to defend or maintain its market share due to its sales, marketing and network quality perception issues. Dividend yield of 3% looks unattractive now. The catalyst for its share price is the NBTC’s planned 2600MHz auctions in 2Q17. 
Recap of results for 4Q15—undershot our estimate
DTAC posted a net profit of Bt998m for 4Q15, down 47% YoY and 19% QoQ. Stripping out a Bt58m FX gain in 4Q15—core profit was Bt940m, down 47% YoY and 41% QoQ. Net and core earnings undershot our models by 38% and 35%, respectively, thanks to higher-than-assumed network depreciation and amortization and SG&A expenses (i.e. marketing, general administrative and bad debt). The earnings plunge was due to a drop in service income and jumps in OPEX (depreciation, amortization, network OPEX, general administrative and bad debt) and interest expense, which outweighed the impact of shallower loss in handset sales and lower regulatory costs. Handset gross loss was 81% YoY and 85% QoQ shallower. Service revenue (excl. IC) slipped 1.6% YoY (but rose 1.4% QoQ led by high season) (see details on page 4).
EBITDA margin squeeze foreseen for FY16
For FY16 operational guidance, it targets a flat or 1-3% YoY rise in service income (excl. IC) against a 3% YoY drop in FY15, an EBITDA margin of 27-31% against 31.5% in FY15 and CAPEX of Bt20bn (close to FY15). It aims to reverse the declining trend of service income and maintain revenue market share in the short term, which will come with higher OPEX from network expansion and more marketing activities and the squeezed EBITDA margin in FY16. In light of more intense price-led competition in 2016, we think that the firm’s targets of 0-3% service income growth and the same CAPEX for FY16 are far too optimistic. We assume a 2.5% drop in service income (excl. IC) and a Bt30bn in CAPEX for FY16. It allocates 20MHz out of 50MHz in hand for 4G services—1800MHz (15MHz) and 2100MHz (5MHz).
Our dividend payout ratio revised down to 60% for FY16
The firm has changed its dividend policy from “no less than 80% of unconsolidated net profit on a quarterly basis” to “no less than 50% of unconsolidated net profit on a semi-annual basis”, effective from FY16, to reserve some cash for new auctions. Hence, for conservative purposes, we cut our consolidated dividend payout ratio assumption from 90% to 60% effective from FY16, which translates into an unattractive dividend yield of 3% in FY16. The new DPS is based on our new FY16 net profit forecast, which we have revised down by 22% (to Bt4.35bn) to reflect higher marketing and general administrative expenses. We have slashed our YE16 DCF-based target price by 10% (to Bt31.50).