Total Access Communication

There were two extra gains in 3Q10: 1) Bt367m in net IC payments from Hutch (net of tax and revenue share), retroactive to Dec 2009-June 2010 and 2) a Bt183m in gain on the sale of the Chai building (net of corporate and property taxes). Stripping out these two extra gains in 3Q10, core profit in 3Q11 would have risen a solid 13% YoY but dipped 5% QoQ.

The solid YoY earnings growth is attributable to: 1) a strong rise in service revenue (excl. IC), driven by double-digit data revenue, 2) strong handset sales growth associated with a low 3Q10 base, 3) very efficient OPEX control—lean SG&A and a tumble in interest expenses—and 4) a jump in the net IC gain. Earnings rose despite a 5% increase in the effective corporate tax rate from Jan 2011, due to the expiry of a five-year tax reduction granted for listing on the SET. Data revenue is likely to post a rise of 30% YoY and 5% QoQ, driven by smartphones. Sales in 3Q10 were quite low because consumers were waiting for the iPhone 4 to launch. The firm paid a Bt3bn debenture due on August 24, 2011, which resulted in a further decline in interest expenses.     

The QoQ slippage is due to: 1) higher marketing expenses, 2) a significant drop in handset sales pending the launch of iPhone 5, 3) a decline in DTAC's net IC gain, due to Hutch making promotional adjustments, and 4) two weeks of revenue-sharing obligations having risen from 25% to 30% (on Sept 16). The QoQ rise in marketing expense was due to the launch of 3G services on 850MHz in mid August and heavy marketing expenses in Sept. Moreover, there was a 50% discount on 1200 iPhone handsets in 3Q11. With regard to other OPEX, network amortization should post a slight QoQ increase, while bad debts and general administrative expenses should decline QoQ. The modest QoQ fall in interest expenses is due to the repayment of a debenture at the end of August.

With regard to service revenue (excl. IC), we estimate a rise of 9% YoY and 2% QoQ. The QoQ rise is due to seasonality (the second-quarter is normally the lowest of the year). There wasn't any obvious impact of flooding on usage during July-Aug. But we anticipate some modest negative impact on MOU in Sept.  

Figure 1: Quarterly service revenue (excl. IC) growth versus profit

Service revenue (excl. IC) growth, quarterly    Net profit and core profit, quarterly 

Sources: Company data, Bualuang Research estimates

Estimate special DPS of Bt5-8/share in October: Given the hefty Bt38bn in retained earnings at end-June, equivalent to Bt16/share, and the fact that a Bt3bn debenture with an attached 70% dividend payout ceiling covenant matured on August 24, 2011, we expect DTAC to pay a Bt5-8 special DPS in October, using the following funding sources: 1) Bt3/share of cash on-hand and 2) Bt2-5/share of new debt.

The estimated Bt5-8 special DPS factors in the following variables: 1) Bt16/share in retained earnings at end-June, 2) the retirement of a Bt3bn bond (Bt1.3/share) in August 2011 with cash (assuming no refinancing), 3) a retained earnings safety buffer of Bt10-15bn (Bt4-6/share), 4) an estimated 3Q11 net profit of Bt2.87bn (Bt1.21/share) and 5) assumed cash on-hand (excl. short-term investment) of Bt9.9bn at end-Sept (Bt4.2/share).

Given estimated cash on-hand of Bt9.9bn at end-Sept (Bt4.2/share) after retiring the bond and the inclusion of the estimated 3Q11 net profit, we would expect the firm to have to incur additional debt of Bt5-12bn to pay a special DPS in the Bt5-8 range. For the moment, our special DPS assumption remains just Bt5/share.