Total Access Communication

Total Access Communication Plc (DTAC)
 

Investment thesis: DTAC’s stock price has lagged during the last four months because investors penalized it over three issues—perceived network quality problems, anticipation of 2Q12 earnings slippage and concerns that the NBTC might categorize it as “foreign dominated”. Those issues have now passed. On June 27, the NBTC approved its 3G IM and reserve price, so we expect DTAC’s share price to rise in the run-up to 3G license auctioning in mid Oct. Our BUY rating stands, based on: 1) the greatest scope for upside from a 3G license, 2) 2H12 operational improvements and 3) a good yield of 6-7%.
Modest 2Q12 profit slippage expected: We estimate Bt2.91bn net earnings for 2Q12, down by 4% YoY and 3% QoQ. The modest YoY decline is attributable to higher expenses—network OPEX, interest and revenue-sharing obligations—which outweighed the effect of top-line expansion and the headline corporate tax cut. Service income (excl. IC) is anticipated to rise by 11% YoY and 3% QoQ, led by nonvoice revenue (up by 48% YoY and 5% QoQ). Network OPEX will jump as a result of the 3G base station buildout (on 850MHz bandwidth).
DTAC can bid for a 3G-2.1GHz license: Management said that DTAC will set up a 100%-owned subsidiary to bid for a 3G license on 2.1GHz. Note that at end-April Telenor Asia Pte Ltd held 42.61% of the firm and Thai Telco Holdings Ltd 22.84%. Because the 3G licensee company (assuming that it won licenses) would be owned by DTAC, which is a Thai entity, we don’t see any problem with it bidding for 3G licenses. Note that the proposed FD draft regulation places no restrictions on the number of foreign managers that may be employed by a firm under its supervision or what positions foreign executives may hold. Hence, DTAC is in the clear.
2H12 operational improvement: We expect YoY operational improvements in 2H12, driven by data revenue expansion, a lower churn rate (DTAC has sorted out its network quality problems) and cost reductions as a result of the completion of a software upgrade. DTAC’s churn rate peaked in 1Q12.
Outlook  
Modest 2Q12 earnings slippage expected: We estimate a Bt2.91bn net profit for 2Q12, down by 4% YoY and 3% QoQ. Stripping out FX, core earnings are expected to slip by 4%, both YoY and QoQ. The YoY decline is attributable to higher network OPEX, a jump in interest expenses and a rise in revenue-sharing obligations to 30% (effective Sept 16, 2011), which outweighed the effect of top-line expansion and a 7% headline corporate tax cut to 23%. The modest QoQ decline is mainly due to a tumble in handset sales associated with the absence of a new iPhone model and a jump in network OPEX.