Advanced info service

Advanced info service Plc (ADVANC)   

- Higher revenue, lower cost boost 4Q14 normalized profit to year’s peak   

 

Due to a high season and quality 3G network after its aggressive investments, ADVANC’s service revenue (IC excluded) could grow 2.2%qoq and 3.5%yoy. On the other hand, cost of service (IC excluded) dropped 4.5%qoq as regulatory cost had decreased by 16%qoq, more than other quarters, because of increasing customer migration from a 2G system, which has regulatory cost of 25%, to a 3G system, which has regulatory cost of 5.25%, from 88% of total subscribers in 3Q14 to 92% in this quarter. In addition, the company has benefited from a roaming discount agreement for subscribers migrated from 2G to 3G network who still use old-feature mobile phones that support only 2G service (see page 2).  

 

Consequently, 4Q14 normalized profit increased significantly by 9.5%qoq to B9.8bn. However, in this quarter ADVANC recognized extraordinary expense of B767m (mainly from adjustment of deferred tax to meet with the current business situation). As a result, 4Q14 net profit was B9.1bn, growing 1.9%qoq. Overall, FY2014 profit was B36bn, staying flat yoy, in line with our forecast. 

 

- Profit to grow 16% in 2015   

 

We are bullish that ADVANC’s profit would revert to growth again in 2015 from three following factors: 1) the reviving economy and improving purchasing power would help boost the service revenue growth, from only 1.2%yoy in 2014; 2) regulatory cost to service revenue would decrease significantly from last year because ADVANC will benefit from subscriber migration for a full year; 3) the company will stop recognizing amortization cost of almost B3bn/quarter for 900 MHz 2G equipment after the concession ends on September 15, 2015. Accordingly, we maintain our profit forecast of B42bn or the growth of 16%yoy for FY2015. 

 

- Good profit outlook with upside from 4G network auction    

 

ADVANC’s profit outlook is very promising. In addition, the company will most benefit from the promised 1800 MHz auction this year since, if winning, it would be able to operate 4G service like DTAC and TRUE, which will help boost its growth in the long run. 2015 fair value has an upside plus dividend yield of 20.6%. We reiterate BUY. 2H14 dividend is announced at B5.96 (dividend yield of 2.4%), going XD on March 26. 

- Regulatory cost lower than usual due to roaming agreement    

 

ADVANC's 4Q14 regulatory cost dropped more rapidly than other quarters. Regulatory cost to service revenue (IC excluded) ratio decreased from 15.6% in 3Q14 to 12.8% in 4Q14 (versus 1-2%/quarter recent average drop) owing to the following factors:  

 

1) More subscribers have been migrated from 2G network (25% regulatory cost) to 3G network (5.25% regulatory cost) in 4Q14. 

 

2) 45% of subscribers migrated from 2G to 3G network still use old-feature mobile phones that cannot support 3G service, which means they still have to depend on 2G network (old concession) for data roaming. The roaming rate from 2G to 3G is B0.6 per minute with a sliding scale discount when the usage reaches the agreed limit. In this regard, ADVANC has to pay regulatory cost to TOT, a 2G concession owner, at a rate of around 25% of the roaming revenue. Since the roaming usage in 4Q14 is projected to exceed the limit for the second consecutive quarter, the reduction of the roaming rate would have a retrospective starting from April 2014, which means regulatory cost for the roaming revenue in 4Q14 would decline significantly.