True Corp.

positive, with most developments largely in line with us. Key takeaways: 

- It is on track to reach breakeven on its bottom line for the first time in 4Q14 on a slash in interest expense to Bt600-700mn/quarter starting in 4Q14 from Bt1.5bn in 3Q14 plus no more depreciation on 2G 1,800MHz of ~Bt1.5bn/quarter.

- The transfer of 1K towers to TRUEIF in 3Q14 provided gain of Bt1bn. It will transfer another 2K towers in 4Q14 that management expects will give another Bt2bn extra gain in 4Q14. It will deliver another 3K towers to the fund next year.  

- It has set capex of up to Bt43bn for the next two years for its fixed broadband and mobile businesses. Bt33bn will be spent on expanding Fibre-To-The-Home (FTTX) to cover 10mn households from 5mn currently. Another Bt10bn will be used to expand the 4G 2.1GHz network to cover 80% of the population from 30-40% now.

- Cost controls remain a priority to boost EBITDA margin. The primary focus is on cutting staff needs, particularly implementation staff. In this way, it targets to expand EBITDA by 5% a year for the next three years, starting from 2015.

Expect 4Q14 to start a new era. As does the company, we expect TRUE to report its first core profit in 4Q14, which we forecast at Bt2.2-2.5bn, driven by the steep decline in interest expense upon a substantial debt repayment in early September and a fall in depreciation expense of ~Bt1.5bn as 3Q14 was the final quarter to record depreciation on the 2G 1,800MHz network. A plus for 4Q14 is a one-time gain of Bt2bn from the transfer of 2K towers into its infrastructure fund.  

Earnings to accelerate to Bt5.5bn in 2015 and more than double to Bt11bn in 2017, underpinned by operational leverage and better cost control. We estimate 70% of its operating costs are now fixed, allowing the rise in revenue to flow directly to the bottom line. Based on our calculations, a 56% migration rate to 3G 850MHz - which it has already achieved – will lift the bottom line to breakeven. However, migration is reaching 87% and this will add bulk to the bottom line. Overspending on marketing should also subside as it is no longer the underdog in terms of network. 

Maintain Buy with DCF PT of Bt11.5. We reiterate our buy call on TRUE. Looking the present price, upside seems limited, but we see upside potential to our forecast in EBITDA margin. Our assumption for EBITDA margin is ~1% below the company’s target and incorporates only expansion arising out of operational leverage driven by rising revenue. A sensitivity study suggests that adding 1 pp to EBITDA margin will add 18% to our 2015F and 30% to 2016F.