Advanced Info Service

Advanced Info Service Plc (ADVANC)

Investment thesis: ADVANC’s share price has rallied in recent months to factor in 3G value ahead of 3G auctioning, expected by 2H12. Despite the rally, we think its share price will rise more, led by further 3G developments during the next nine months. We regard the recognition of a one-off deferred tax expense provision in 4Q11 (in response with the enactment of the govt’s headline corporate tax cut from 30% to 23% in FY12 and to 20% from FY13) as a short-term negative, which will reduce FY11 EPS and DPS by about Bt1/share. Our BUY rating stands, premised on: 1) solid FY12 core profit growth, 2) 3G developments over the next nine months and 3) a good yield of 7%.
A flat 4Q11 core earnings estimate: We expect a Bt2.97bn net profit for 4Q11, down by 49% YoY and 52% QoQ. Two major one-off non-cash items will be booked for the quarter—a Bt384m goodwill impairment for DPC and a Bt2.94bn deferred tax expense provision. Stripping out those two items, core earnings would have risen 1% but slipped by 4% QoQ. The slight YoY increase in core earnings is because solid revenue expansion was accompanied by higher OPEX (network OPEX, marketing and bad debt expenses). The QoQ core profit dip is due to: 1) higher network OPEX with the installation of more 3G (on 900MHz) cell sites, 2) a seasonal jump in marketing expenses, the booking of rebranding expenses and shop renovation costs and 3) a slimmer net IC gain. 
FY11 net profit cut: We have cut our FY11 net profit estimate by 14% to Bt21.5bn to factor in the one-off Bt2.9bn deferred tax expense provision in 4Q11.
Network co-siting with TOT in-progress: TOT signed a cellular network rental contract with ADVANC on Dec 30, 2011 to install 1900MHz 3G base stations on existing ADVANC base station sites. The contract is valid for four years. Initially, TOT will rent 800 ADVANC base station sites for its 3G base stations with an option to expand to another 800 sites. Note that ADVANC and TOT already have a co-roaming deal for their networks. IR indicated that ADVANC may get an opportunity to use some of TOT’s 1900MHz bandwidth in heavy traffic areas, which would boost its wireless broadband service capacity.