Total Access Communication

Total Access Communication (DTAC)
Cost of service grows less than expected, pushing 3Q13 profit above projection
DTAC's 3Q13 net profit was reported at B2.74bn, falling 6%qoq due to B375m
extraordinary income in 2Q13 compared to B53m Fx loss in 3Q13. However, 3Q13
normalized profit was B2.8bn, growing 9%qoq, better than expected. Though DTAC's
marketing expense was higher than expected, it was compensated by 3Q13 gross margin
that improved from 28% in 2Q13 to 33%. Cost of service (new SIM production cost and
amortization of 2G license) declined from 2Q13 more than expected, while 3Q13 gross
margin from mobile phone sales improved from 2Q12 (mostly the phone under its own
brand, of which the gross margin is higher than other brands). Moreover, there was
additional income from suppliers, as phone sales of other brand reached the target. In
addition, ratio of income sharing to service income decreased as expected. DTAC
recognized benefit from new 3G under 2.1 GHz license which collects 5.25% income
sharing, versus 30% income sharing from 2G concession, after it started providing 3G
service under 2.1GHz frequency since 23 July, and 3.7 million subscribers were migrated
to new 3G network (13.4% of total subscribers). However, total income (excluding IC)
contracted by 5.5%qoq to B21bn due to low season, and 3Q13 phone sales declined by
32%qoq because buyers were waiting for new iPhone.
- 4Q13 profit to stay flat due to expenses. To benefit from new license in 2014
Under our conservative method, DTAC's 4Q13 profit would stay flat from 3Q13. Though
4Q13 income would improve from 3Q13 due to high season and sales of new model of
iPhone from 25 October on, DTAC might recognize additional expense from investment
on 3G network under 2.1GHz frequency (depreciation cost and interest expense, which
was initially recognized as asset), as well as marketing expense that is also likely to be
continuously high. Income sharing would not decline significantly, as DTAC needs to
migrate more subscribers to new 3G network to achieve the target of 10 million
subscribers (36% of total subscribers) from 3.7 million in 3Q13. Due to higher marketing
expense than expected, 9M13 net profit made up only 66% of FY2013 earnings forecast.
As DTAC needs to spend more marketing expense from now on due to fiercer
competition, we revise down DTAC's FY2013-2014 net profit forecast by 9.6% and 9.8%,
respectively. Under new forecast, DTAC's FY2013 net profit is projected to grow by 3.7%
to B11.7bn. However, DTAC would rebound by 25.5%, becoming outstanding in the
sector in 2014, as it would benefit most from decreasing income sharing. DTAC
previously paid the highest income sharing from 2G concession. As subscribers are
migrated to new 3G network, DTAC would be able to reduce the most cost.
- "BUY". Switch to use FY2014 fair value, 19% upside
FY2014 profit is likely to prosper, and we have changed to use FY2014 fair value (DCF)
at B136 that implies 19.3% upside with expected dividend yield at 4-5%/year. We
reiterate "BUY". Dividend from 3Q13 earnings result would be paid at B1.32/share or
1.2% dividend yield. XD date is 13 November.