Total Access Communication

Total Access Communication Plc (DTAC) 

Investment thesis
We have upgraded our DTAC rating from SELL to BUY, as its stock price has fallen below our YE14 target. We expect subdued 1H14 earnings, due to heavy OPEX, the weak state of the economy and heightened price competition, then an HoH jump in 2H14. However, within Telecoms space we still prefer ADVANC, as its FY14 PER is only 16x against DTAC’s 18.5x.
Flat YoY core earnings expected for 4Q13
We estimate a Bt2.53bn net profit for 4Q13, down by 2% YoY and 8% QoQ. Stripping out FX, core earnings would be Bt2.56bn, flattish YoY and down 9% QoQ. The effect of higher YoY service income (excl. IC) and lower interest expenses would have been more-or-less offset by a jump in OPEX—a 71% YoY surge in marketing expenses, network OPEX, depreciation and amortization costs related to the 2.1GHz spectrum fee and network rollout. The expected QoQ slippage is due to heavier marketing expenses—we model for a rise of 11% QoQ.
Rises of 3% YoY and 10% QoQ in network OPEX and 18% YoY and 2% QoQ in depreciation and amortization expenses are expected to be posed, due to accelerated 2.1GHz cell site expansion—5,800 sites at YE13, up from and 4,765 sites at end-Sept (in order to achieve 50% population coverage). Regulatory costs are assumed to have eased a little QoQ.
Total service revenue (excl. IC) is estimated to have grown by 6% YoY and 2% QoQ, led by nonvoice (up by 40% YoY and 5% QoQ). Note that both 4Q13 total service income (excl. IC) and nonvoice receipts are likely to post slower YoY expansion (the YoY growth rates in 3Q13 were 10% for total service and 55% for nonvoice), due to intensified competition and the consumption slowdown. We assume that voice income will report a drop of 9% YoY and 2% QoQ. The weak domestic economic environment (exacerbated by the political unrest) prompted us to model for an 11% YoY drop in sales revenue.
The subdued 1H14 earnings outlook
Given the prevailing malaise in consumption spending, we expect voice usage to drop and data usage growth to slow in 1Q14. Moreover, heightened price competition will dampen service income in 1H14. But we expect significant net regulatory cost savings in 2H14 once the 3G network has 70-80% population coverage—the effect of higher revenue-sharing obligations tied to roaming on concession bandwidth should be outweighed by lower costs for licensed bandwidth. That would make for much stronger earnings in the final two quarters of the year.