The telecom sector faces a challenging outlook amid stiff competition based on the latest quarterly results from two major operators, says Fitch Ratings.
Fitch expects domestic telecoms to embark on aggressive marketing, pressuring profitability, most notably for third-ranking Total Access Communication Plc (DTAC).
Mobile leader Advanced Info Service (AIS) and DTAC both reported a decline in mobile revenue growth and Ebitda (earnings before interest, taxes, depreciation and amortisation) as a consequence of unlimited data plans.
AIS's mobile service revenue growth in 2018 decelerated to 1.3% from 3.3% in 2017, while mobile service revenue of DTAC declined by 0.7%, compared with 0.7% growth in 2017.
Aggressive marketing promotions, including handset subsidies, resulted in AIS's Ebitda declining 2% year-on-year in the fourth quarter of 2018, while DTAC's fell 23%.
Fitch expects the challenging operating environment to continue in 2019. It said DTAC could become more aggressive in promotions to win back market share, offsetting any savings from cost-optimisation plans.
DTAC's earnings will also be affected by payments from a legal settlement to CAT Telecom for equipment rental and TOT Plc for use of the 2.3GHz spectrum. Fitch expects DTAC's Ebitda margin to decline to 36.5% in 2019 from 37.8% in 2018, while AIS's strategy to provide handset subsidies in only some geographical areas could blunt the impact on its Ebitda margin.
Fitch said DTAC's market position will likely strengthen in 2019 after acquiring 1.8GHz and 900MHz bandwidth. This should help plug the gap in spectrum portfolio and network quality that has constrained competitiveness over the past few years.
Meaningful network improvements and brand rebuilding may pay off after only a few more quarters, suggesting Ebitda recovery will probably take place in 2020. This should allow DTAC to maintain leverage within Fitch's negative rating guideline of 2.5x. DTAC's financial leverage was 2.0x in 2018.
AIS should continue to benefit from its strategy to diversify its telecom business into fixed broadband. Fixed broadband has shown greater stability and growth prospects than mobile over the past few years.
Fitch expects continued growth in AIS's overall service revenues, with the visibility of operating cash flows and the more moderate capex allowing the company to manage leverage at an acceptable level based on its medium-term ratings.
AIS's free cash flow is likely to turn positive in 2019, due to lower spectrum payments and falling capex after the completion of the massive build-out of its 3G/4G networks. This should result in a reduction of funds from operations adjusted net leverage to 1.5x-1.6x in 2019, down from 1.7x in 2018, giving AIS more ratings headroom and financial flexibility to support increased marketing expenses.