True Corporation

True Corporation Plc (TRUE) 

 

TRUE is well on its way to reaching its ambition of a 34% revenue market share by 2018 after rising to 20.8% in 4Q15 (from 15%), fuelled by its consistent buildup of network quality. The addition of 900MHz and 1800MHz to its stable doubles bandwidth and gives it the best mix between lower and higher bands. Importantly, 900MHz gives TRUE entry into the fort ADVANC has been building for the past 25 years, particularly its prepaid users: ADVANC now has 58% against TRUE’s 13% share of this market (DTAC has 29%). The capital call brings financial health with EBITDA below 2x. We Buy TRUE.   

 

Positive tone from non-deal roadshow. We held a non-deal roadshow for TRUE management with local funds. Every meeting was well attended. We are positive on the firm’s strategy for its two licenses on 900 and 1800MHz. The cash call will keep net debt to EBITDA ratio below 2x, in line with ADVANC and DTAC. Key takeaways:  

 

- TRUE has obtained a bank guarantee and is ready to make the first payment on the 900MHz license. However, it is holding back for a little while to see what the NBTC will do if JAS cannot make its payment. The NBTC appears to favor a new auction within one or two months after the March 21 deadline for the first payment, with the starting the same as JAS’ winning bid. If there is no interest at that price, this license would be held back for twelve months and then a new auction held – but again the starting bid would be JAS’ winning bid. In any case, TRUE will make its payment soon.  

 

 TRUE plans an aggressive rollout of its new 900MHz spectrum to cover 98% of Thailand’s population by May. The rapidity is made possible by the fact that TRUE can simply install the 900MHz radio frequency on its existing 850MHz towers, which already cover 98% of the population. It will use 900MHz for 2G, 3G and 4G and will further invest in 1800MHz and 2100MHz for 4G. It has set a three-year capex budget of Bt57bn, spending 64% on 900MHz and 36% on 1800MHz and 2100MHz.     

 

- The acquisition of 900MHz and 1800MH licenses gives TRUE the largest and best combination of bandwidths. As TRUE has only half the number of subscribers as ADVANC but the largest bandwidth, TRUE can offer twice the speed as ADVANC. What is most important is that the 900MHz will allow it an entry into the well-defended fort ADVANC has been building for over 25 years. There are ~85mn handsets available in Thailand, but before it got 900MHz, only half could connect with TRUE’s network on 850MHz, 1800MHz and 2100MHz. The addition of 900MHz means all handsets in Thailand can access TRUE’s network. This is especially important for prepaid users, which will no longer be able to access the 900MHz network. Currently, TRUE has only 13% of the prepaid revenue market with ADVANC holding 58% and DTAC 29%. TRUE believes this will allow it to get a revenue market share of 34% by 2018 from 20.8% as of 4Q15. 

 

- TRUE notes that the costs of the licenses will sink profitability only in 2016 and it will be back in the black in 2017 when a surge in revenue from the steady rise in revenue market share will more than offset the license-related costs. To put this in another way: TRUE’s increase in market share added ~Bt8bn in revenue from the mobile business in 2015 and it expects this to be repeated this year. It will at the same time begin to book amortization expenses from 900MHz and 1800MHz of ~Bt7bn in 2016, which will then form a base going forward. This implies that TRUE’s earnings will be adversely affected by the license costs in only 2016. 

 

 As for the competitive landscape, even if JAS can make the payment, it is too small in terms of capital and bandwidth to compete on a large scale with the incumbents. Hutchison is a good example of this: it entered into market with a handset subsidy and pricing strategy. But coverage was too limited, which led to 

poor quality and it ended up with only 1m subs and was in the end forced to exit the market in 2011.      

 

- The capital increase was made at this time to avoid gearing up the balance sheet and breaching TRUE’s own ceiling of a debt to EBITDA ratio not above 2x. Most of the proceeds will be used to pay down debt to leave room for borrowing without stretching its balance sheet.  

 

- Two major shareholders, CP group and China Mobile, have indicated they are interested in participating in the capital call. If so, it means TRUE can raise at least Bt41bn (vs. target of Bt60bn), which it believes is sufficient to pay down debt and thereby lower its net debt to EBITDA ratio.    

 

Reiterate Buy call. We recommend existing shareholders subscribe to this capital increase to mitigate the dilution and at the same time benefit from the company’s steady growth in revenue market share. Incorporating the dilution gives a new target price of Bt10.2-10.5 (based on share price of Bt5.8-6.4), 

which is still way above the current share price. TRUE has lifted the concern on the cash call and given its steady gain in revenue market share, we continue to rate it a Buy. Based on our forecast, the cost of the license will put TRUE back in the red in 2016, but gains in revenue market share will swing earnings back up from 2017, which is in line with guidance.