Advanced Info Service

Advanced Info Service Plc (ADVANC) 

 

Investment thesis

We have upgraded our FY16 net profit forecast by 3% (to Bt30.54bn) to reflect a higher EBITDA margin (from 33% to 33.8%) and lower OPEX than assumed and lifted our DCF-based target price 6% (to Bt180). Our BUY rating stands, based on the decent 6.2% yield of despite its FY16 earnings decline and the expected heightened mobile competition.  

Recap of 4Q15 results—core profit slightly above model 

ADVANC posted a Bt10.79bn 4Q15 net profit, up 18% YoY and 25% QoQ. Excluding FX gain—core profit was Bt10.59bn, up 7% YoY and 21% QoQ. Net and core profits beat models by 6% and 4%, respectively, on the lower-than-estimated depreciation and regulatory expenses. The YoY rise was due to the missing 2G asset amortization expense and a decline in regulatory cost, which outweighed the OPEX rises and a service income dip. Service revenue (excluding IC) dipped 0.5% YoY and 0.2% QoQ (see details on Page 4).

EBITDA margin squeeze expected in FY16 

The firm guides the following FY16 operational targets—flattish service income (excl. IC) against a 2% YoY rise in FY15, the handset margin of 3-4% (led by the new accounting practice of booking handset subsidies under SG&A items), the decline of consolidated EBITDA margin to 37-38% from 45.7% in FY15 and CAPEX of Bt40bn (for 4G network rollout and the 3G network expansion, FTTH fixed broadband (FBB) network and AIS shops). The FY16 depreciation and amortization expenses will fall 25% on the fully amortized 2G assets of 900MHz concession which expired in Sep 2015. It maintains a 100% dividend payout policy for FY16, based on its strong operating cash flow and capital structure. 

TOT partnership deal expenses partially factored into our model 

Its flattish FY16 service income guidance factors in the 2G service shutdown, which will offset the strong 4G and FBB revenues. The FY16 EBITDA margin drop factors in Bt8bn in handset subsidy and roaming costs for 2G users, the loss of partial 2G subscribers and revenue (from the shutdown) and expenses related to the TOT deal. Our flattish FY16 service income (excl. IC) is in line but our FY16 EBITDA margin of 33.8% is more conservative, given that we have partially factored in some expenses related to the TOT deal (the rental expenses of the organization’s towers, 2G equipment and last-mile cables and the investment in TOT’s 2100MHz network expansion based on its 80% MVNO capacity purchase from TOT and maintenance expenses for its 2G assets and added 2100MHz network). 

The partnership deal with TOT is expected to be signed in Mar 2016, pending the Attorney-General’s review. Our Bt44bn FY16 CAPEX assumption is more conservative than the firm’s. It has so far migrated 2.6m 2G users to its 3G/4G licenses. Although the 2G service will automatically be shut down once JAS or TRUE makes the first 900MHz license payment, its 2G services will continue through a roaming arrangement with DTAC’s 2G networks.