Advanced Info Services
Preview 2Q16: Regaining its feet and edge BUY
Advanced Info Services Plc (ADVANC)
The win of the 900MHz license has made subsidies less urgent, giving good support to 2Q16 QoQ. In 2H16, things will get even better, with higher growth, lower subsidies and lower costs after a delay in rental of TOT’s network. Interim DPS is estimated at Bt5.84, implying high yield of 3.7% for a two-month holding period. 1H16 looks to be 61% of forecasts, making it a candidate for upgrades. Buy is reiterated.
Slightly positive tone at the meeting. We met with management to obtain a preview of 2Q16 performance. The key takeaways from the meeting are below.
Service revenue ex IC in 2Q16 is expected to be flat YoY and QoQ, with a continued rise in non-voice revenue both YoY and QoQ and an increase in international roaming (IR) revenue from growing tourist arrivals offsetting the steady plunge in voice revenue both YoY and QoQ, which is becoming less important as a source of earnings.
Regulatory cost/service revenue ex IC ratio continues to slim from 1Q16’s 7.9% as more subscribers migrate to license-based networks (3G 2.1GHz and 4G 1.8GHz).
It began to scale back its handset subsidy to lure its 2G subs to 3G and 4G after deciding to go after the 900MHz license in May. This will reduce the handset subsidy in 2Q16 from 1Q16’s Bt3.4bn.
Other costs related to new licenses, especially 1.8GHz, are surging QoQ, specifically amortization expenses and network opex. Note that amortization of 900MHz will not begin until 3Q16.
There is little progress in the partnership with TOT. The contract is still under consideration by the Attorney General’s Office.
2Q16F expected at Bt9.27bn, up 15% QoQ but down 6% YoY. Behind the QoQ growth is lower regulatory costs and handset subsidies. Behind the YoY decline is the handset subsidy: we estimate it spent ~Bt2.3bn in 2Q16 (vs. Bt3.4bn in 1Q16 and none in 2Q15). It is cutting back on subsidies after getting the 900MHz license, so this expense will be lower from here on out. It had initially planned to spend Bt8bn on subsidies in 2016 – since it had thought the door was closed on the 900MHz license - and of this spent ~Bt5.6bn in 1H16. If 2Q16 comes out as expected, 1H16 will account for 61% of our full-year forecast and may qualify it for upward revisions, backed by lower handset subsidy, lower cost for renting 2.1GHz from TOT (if the deal is put off to next year) and the return of service revenue ex IC after getting 900MHz.
Buy, target price of Bt190. We maintain Buy on ADVANC with unchanged DCF-based target price of Bt190. ADVANC will pay an interim DPS that we estimate at Bt5.84, giving a high dividend yield of 3.7% (XD is around August). It is also a target for earnings upgrades by the street as its competitive edge has been restored by the win of 900MHz, which also slashes the need to subsidize handsets to move subscribers.
