Advanced Info Service

Advanced Info Service Plc (ADVANC) 

 

Investment thesis

We expect ADVANC earnings to recover strongly in 4Q15, led by the high season and the absence of 2G asset amortization expense. The catalyst to its share price will come from the partnership deal with TOT expected this Nov or 4Q15 and the potential winners for both 1800MHz and 900MHz licenses in 4Q15. The stock remains our sector pick. We rolled over our target price to YE16 and derived a new one of Bt280.  

3Q15 results recap—core profit in line with model 

ADVANC posted a Bt8.62bn net profit for 3Q15, down 4% YoY and 13% QoQ. Excluding an extra item in 3Q15—a Bt132m FX loss—core earnings were Bt8.75bn, down 3% YoY and 11% QoQ. Net and core profits were in line with models. The 2G assets under the Build-Transfer-Operate (BTO) concession were fully amortized in 3Q15. The YoY core profit dip was led by jumps in marketing and depreciation/amortization expenses and deeper negative handset margin, which outweighed lower regulatory, network OPEX costs and higher service income. Service revenue (excl. IC) rose 2.0% YoY (but dropped 1.7% QoQ) (see details on Page 4).

FY15 operational guidance maintained 

The firm maintains its FY15 operational targets—service income (excl. IC) growth of 3%, the handset margin of -5% to -6% (due to subsidies on items such as handset giveaways, trade-ins and cheap upgrades), the flattish consolidated EBITDA margin (due to a negative handset margin), the 200bps rise in service EBITDA margin and CAPEX of Bt36bn. Given the 9M15 handset margin of -1.7%, we expect a deeper negative margin of 15-19% in 4Q15 to align with the FY15 handset margin guidance of -5% to -6%, led by continued subsidies in 4Q15. 

Partnership deals with TOT progress well

We expect the depreciation/amortization expenses to decline by Bt3bn in 4Q15, due to the 2G assets being fully amortized in 3Q15 (900MHz concession expired on Sept 30, 2015). Depreciation and amortization expenses will balance out to rise 8-10% in FY15. The revenue momentum will improve in 4Q15, underpinned by high season. We expect a positive impact from government stimulus packages on service revenue in the coming quarters in 2016. The firm is in talks with the NBTC regarding regulatory fees under the remedy period for the use of the 900MHz spectrum, the 2G services under the 900MHz spectrum of which have been extended to December 22, 2015. 

Its partnership models with TOT have progressed well. Such business models, which might be either the joint venture firm or the Infrastructure Fund, will include business collaborations on TOT’s 2100MHz and 2300MHz bandwidths, the co-uses of 2G-3G towers, 2G equipment and last-mile cables. We expect TOT to select ADVANC as a new business partner in Nov or 4Q15. With regard to government’s TowerCo establishment, we believe that it will take longer to materialize due to the difficulty in settling tower disputes.