Thaicom

Thaicom Plc (THCOM)

Investment thesis: Following a conference call with THCOM, we expect three positive news flows in 4Q12—a contract signing with an Indian telco, contract renewal with TOT and the sale of Mfone—to catalyze its share price. The Mfone sale would prompt us to lift our target price by Bt6-7/share. Our BUY rating stands, premised on: 1) robust FY12-13 earnings growth, 2) upside from the sale of Mfone, the launch of Thaicom 7 (in 2014) and IPSTAR progress in China, the Philippines and Indonesia in FY13, and 3) a cheap valuation—FY13 EV/EBITDA of 7x against a 9x long-term mean and a 7.7x regional mean. We have rolled over our investment horizon to YE13 and derived a new YE13 target price of Bt28.
Anticipate a YoY 3Q12 profit jump: We estimate a Bt190m net profit for 3Q12, up by 1,085% YoY and 65% QoQ. Stripping out an FX gain, 3Q12 core profit would be Bt130m, up 235% YoY but down 20% QoQ. The YoY jump is due to well-controlled OPEX (the top-line was flattish YoY and QoQ). The QoQ profit drop is due to a Bt30-40m special payout of employee benefits.
Close to sealing a deal with an Indian telco: The firm is about to close a deal with a big private Indian telco to share about 4Gbps of its gateway (80% of the remaining capacity assigned to India). The 4Gbps contract (11% of IPSTAR’s capacity) would mean huge upside to IPSTAR’s YE13 utilization rate. Assuming the deal is signed in 4Q12, we would expect revenue recognition to start in 2Q13.
Renewal of TOT contract in 4Q12: TOT’s existing contract with THCOM for 1.5Gbps will expire on Dec 10, 2012. TOT must extend its IPSTAR contract with THCOM before Dec. The firm is confident that TOT will buy up to an additional 50% of bandwidth from it. 
IPSTAR utilization rate of 40% by YE12: The CEO now expects the IPSTAR’s utilization rate to reach 40% by YE12, up from 25% currently (the previous YE12 target was 32%) if it closes the deals with both the big Indian telco client (4Gbps) and for additional TOT usage (1.5Gbps) in 4Q12.
Thaicom 9 orbital slot secured in Aug 2012: THCOM secured the 50.5 degrees East orbital slot of Thaicom 9 by partnering with a European satellite operator that repositioned its satellite into that slot on Aug 27, 2012.
Outlook
Anticipate a YoY 3Q12 profit jump: We estimate a Bt190m net profit for 3Q12, up by 1,085% YoY and 65% QoQ, boosted by a Bt60m FX gain. Stripping out the FX item, 3Q12 core profit would be Bt130m, up 235% YoY but down 20% QoQ. The YoY core profit jump is attributable to well-controlled OPEX—service costs fell by 6% YoY and SG&A by 9% YoY. However, the top-line dipped 2% YoY and inched up 1% QoQ. We estimate that revenues from Thaicom 5 rose by 13% YoY and that IPSTAR bandwidth revenue will post an increase of 8% YoY. The estimated YoY rise in Thaicom 5 receipts is due to the adding of 10-20 channels with the use of the bandwidth compression technology in 1H12. However, that growth would have been offset by a decline in IPSTAR sales revenue (much lower YoY user terminal sales). The QoQ earnings decline is due to a special payout of employee benefits (estimated at Bt30-40m) during the quarter (which applied to whole INTUCH group). Gross margin should have been maintained QoQ at 30.4%
The solid YoY rise in 3Q12 IPSTAR bandwidth revenue is underpinned by income from three new Japanese clients—KDDI (in Dec 2011), NTT Docomo (in April 2012) and EMOBILE (in late-2Q12)—and NBN (Australia) and MEASAT (Malaysia) from 4Q11 onward. The three new Japanese clients account for about 20% of the IPSTAR capacity assigned to Japan (0.5Gbps out of 2.5Gbps assigned to Japan). Softbank accounts for 80% of the total capacity assigned to Japan (2Gbps). The marginal QoQ rise in IPSTAR bandwidth revenue is due to a full quarter of recognition of EMOBILE and the gradual ramping up of NBN utilization. We estimate that the telephone unit’s gross loss deepened QoQ, while Lao Telecom’s gross profit rose QoQ.    

Soon to close a deal with a big Indian telco: Currently, VSNL, an existing Indian telco client, takes up about 1Gbps (or 2.7% of IPSTAR’s total capacity). Total IPSTAR capacity allocated to India is 6Gbps. After the Indian Department of Telecoms approved IPSTAR sharing gateways with other operators in 1H12, THCOM has been in talks with several Indian telcos to share IPSTAR gateways. In 2Q12 it closed its first gateway sharing deal with Bharti Airtel, a client of VSNL.
THCOM advises that it will agree a contract with another big private Indian telco to share its gateway before YE12 for about 4Gbps, or 80% of the remaining capacity assigned to India. The new client will take four times more bandwidth than Bharti Airtel (which uses only 1Gbps), which it will use for mobile backhaul. The 4Gbps contract (11% of IPSTAR’s capacity) would mean huge upside to IPSTAR’s YE13 utilization rate. Assuming the deal is signed in 4Q12, we would expect usage and revenue recognition to start in 2Q13.

The renewal of TOT contract in 4Q12: Currently, TOT uses about 1.5Gbps (4% of IPSTAR’s total capacity). The total IPSTAR capacity assigned for Thailand is 2.94Gbps (8% of IPSTAR’s capacity). TOT’s existing contract with THCOM will expire on Dec 10, 2012. TOT is almost certain to extend its IPSTAR contract before Dec. THCOM is confident that TOT will buy an additional 50% bandwidth, given that the state-owned telco has various projects to launch, one of which is the National Broadband (Smart Thailand) project in 2013. 
IPSTAR utilization rate of 40% by YE12: Ms Suphajee Suthumpun, the CEO, said she expects the IPSTAR’s utilization rate to reach 40% by YE12, up from 25% as of now (the previous YE12 target was 32%), if the firm closes deals with both the big Indian telco and with TOT for additional bandwidth in 4Q12. Note that the CEO’s utilization rate guidance is for contracted sales for each client, not actual usage or receipts, which normally rise during the first 12 months or so of the contract to the full bandwidth allocation. As such, we assume the IPSTAR’s YE12 utilization rate at 26% and the YE13 rate at 40% (an average FY13 utilization rate of 35%) in our model. 

Mfone sale expected in 4Q12: The firm reaffirmed the timeframe for the sale of Mfone by YE12. The CEO had previously guided for two options—sale or termination of the operation. THCOM indicated that a sale would be the more likely option and that a loss might be realized on the deal (and a one-time loss provision related to intra-company loans between Shenington and Mfone worth US$30m and another $15-20m in third party loans and related liabilities). Overall, we estimate a one-time loss provision of Bt700-800m in 4Q12 (based on THCOM’s 50% indirect stake in Mfone), assuming that the sale is completed as guided.
The anticipated 4Q12 loss would constitute a one-off non-cash item, which wouldn’t impact cash flow or DCF value. Furthermore, we would upgrade our earnings forecasts for FY13 onward by Bt450-500m on news of the sale. In effect, it would boost the FY13 bottom-line by 53-59% and FY14 profit by 36-40%. Our YE13 DCF-based target price would rise by Bt6-7/share (up 21-25%).
Thaicom 8 to be concluded in early 2013: The CEO set two criteria for launching Thaicom 8: 1) its pre-launch sales must reach 50% (break-even level) and 2) IPSTAR’s utilization rate must reach 40%. Given the additional IPSTAR utilization of 15% in 4Q12 with the anticipated contracts with TOT and an Indian telco, which would bring the YE12 utilization rate to 40% (based on total contracted sale values), we assume that THCOM plans to build Thaicom 8 in 2013.

Secured Thaicom 9 orbital slot in August 2012: THCOM secured the 50.5 degrees East orbital slot of Thaicom 9, which was due to expire in November 2012. It partnered with a European satellite operator, who repositioned its satellite into that slot on August 27, 2012. However, THCOM must clear the frequency allocation with five commercial satellites—two Chinese, one Russian, on Turkish and one owned by a UAE firm—before building the Thaicom 9 satellite.

Recommendation and Valuation

Our new YE13 target price of Bt28: We have rolled over our investment horizon from YE12 to YE13 and derived a new YE13 DCF-based target price of Bt28. The price doesn’t include extra value of Bt6-7/share from the expected sale of Mfone. We will upgrade our YE13 target price on news of the deal. Expected IPSTAR bandwidth sales to a big Indian client and to the TOT are already included in our IPSTAR utilization rate assumption for FY13.
Reiterate our BUY rating: Following a conference call with THCOM, we expect three positive news flows in 4Q12—a contract signing with an Indian telco, contract renewal with TOT and the sale of Mfone—to catalyze its share price. The Mfone sale would prompt us to lift our target price by Bt6-7/share. Our BUY rating stands, premised on: 1) robust FY12-13 earnings growth, 2) upside from the sale of Mfone, the launch of Thaicom 7 (in 2014) and IPSTAR progress in China, the Philippines and Indonesia in FY13, and 3) a cheap valuation—FY13 EV/EBITDA of 7x against a 9x long-term mean and a 7.7x regional mean.