True Corp

True Corp. Plc  

A successful capital increase and the rise to #2 in the postpaid market shoved the share price up and we expect another move up as it challenges ADVANC for top spot. Backing its thrust is its first-mover advantage in 4G, made even keener by the delay in the 1,800MHz auction plus DTAC’s struggle to protect its market share. This suggests that TRUE’s gain in revenue share will continue for at least the next three years. We thus have raised our 2016-17 forecasts and TP to Bt17.  

Further rise in revenue market share. The first-mover advantage in 3G service led TRUE to overtake DTAC to take #2 in postpaid in 4Q14, with a rise in revenue market share to 17.8% in 4Q14 from 15.4% in 1Q13. We do not feel this is the end of the line for gaining share. We now expect TRUE to continue to gain revenue market share for at least the next three years at a rate of 1.3% (the gain in 2013-14). In our assumption, TRUE will end up with revenue market share of 22% in 2017. This is a change from our earlier view that 2014 was it. What changed was the delay in the auction of 1800 MHz that gives it longer to enjoy the first-mover advantage for 4G and DTAC’s struggle to bring up 3G and 4G coverage in cities and provinces. Our model suggests that a 1.3% gain in revenue market for TRUE will translate into 9-10% revenue growth for the next three years starting in 2015 and outperform peers’ 3-4% growth.  

EBITDA margin expanding. The 2014 miss to our projection, which the market believed came from overspending on marketing, instead came from larger network opex as it improved its 2.1GHz network quality – which will eventually lead to higher revenue from this network. At end of 2014, TRUE had about seven thousand 2.1GHz base stations for both the 3G and 4G networks. It plans to raise this to 9,000 in 2015, which will cost less than in 2014. Rather than overspending, selling and marketing expenses in 2014 were actually down by 12% from the peak of Bt10bn in 2013, though still twice as large as peers. As it dedicates itself to better control over this cost, we expect marketing expenses to come down further from 2015. Steady cost control with less network opex will expand EBITDA margin further in 2015.      

Expect first profit in 2015, doubling in 2016. Though we still expect TRUE to be in the black for the first time this year, we cut our 2015 forecast by 20% to reflect the more rapid network rollout that has been raising network opex since 3Q14. However, we lifted our forecasts by 23% for 2016 and 30% for 2017 to factor in our bullish assumptions for gain in revenue market share. Following the adjustment, our 2015 profit is Bt4bn, more than doubling to Bt10bn in 2016 underpinned by rising revenue and EBITDA margin expansion.   

Buy with a DCF PT of Bt17. Our new DCF-based target price is Bt17 (up from Bt11.50) driven by the effect of TP roll-over to end of 2015 from mid-2015 and our upward revision in earnings. Our DCF method is based on cost of debt of 5% and cost of equity of 10.9%, where we assume a market risk-free rate of 4.5% and a risk premium of 7.5%, WACC of 10.2% and terminal growth rate of 3%.