Fitch: Competition, sluggish mobile pressures DTAC, AIS

Fitch: Competition, sluggish mobile pressures DTAC, AIS

The first-quarter results of two major Thai telecom operators highlight the challenges facing the industry amid a slowing mobile sector, says Fitch Ratings.

Domestic telecoms are likely to compete aggressively, including offering unlimited data packages, putting further pressure on their revenue and delaying an earnings recovery.

Fitch believes the third largest operator, Total Access Communication Plc (DTAC; BBB/AA/stable), will be the most affected because of its broad exposure to mobile revenues. In contrast, the largest operator, Advanced Info Service, (AIS; BBB+/AA+/stable) has diversified into fixed-broadband services, which should reduce the risk of slower growth in the mobile segment.

DTAC's service revenue declined 5.7% year-on-year in the first quarter of this year, but the earnings before interest, taxes, depreciation and amortisation (Ebitda) contraction was steeper at 26.3% year-on-year, as aggressive marketing promotions took a toll on profitability.

Meanwhile, AIS's Ebitda was flat year-on-year, despite revenue rising 2.5%, with its growing fixed-broadband services offsetting a flagging mobile business.

Thai telecom operators are likely to continue to face pressure on mobile service revenues, beset by slowing growth in data revenue. Growth in data subscriptions has started to decelerate in the past few quarters on higher 4G device penetration.

In addition, the growth in data usage for existing subscribers is not translating fully into higher revenue, given the fierce competition in data tariff offerings. Data revenues are not growing sufficiently to offset the decline in legacy voice and SMS services, resulting in a drop in overall service revenue over the next two years.

Operators may need to cut tariffs further or deepen handset subsidies to accelerate data service adoption in the lower-tier segment. The number of 4G device users in Thailand is already high, accounting for 69% of DTAC's subscriber base and 63% for AIS as of March this year.

However, operators will need to monetise data better to achieve revenue growth in the longer term when data penetration approaches saturation. This requires adjusting data pricing to move away from unlimited and large data allowance packages and charging subscribers based on usage. Service bundling, such as quadruple play, should also help increase customer stickiness and support average revenue per user. This shift may prove challenging in a highly competitive market.

Fitch expects DTAC's market position to strengthen in 2019 after acquiring 1.8-gigahertz and 900-megahertz spectrum. This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years.

Yet meaningful network improvements and brand rebuilding may take longer than a few quarters, suggesting an Ebitda recovery will not take place until 2020 at the earliest. A slow recovery will not immediately affect the company's ratings as its financial leverage -- at 2.2x as of March this year -- remains below Fitch's negative rating guideline of 2.5x.

AIS should continue to benefit from its diversification into fixed broadband, offering greater stability and growth prospects than mobile the past few years.

"We expect continued growth in overall service revenues, the visibility of operating cash flows and the more moderate capital expenditure to allow the company to manage leverage at a level that is commensurate with current ratings in the medium term," said Fitch.

AIS's free cash flow is likely to turn positive in 2019 thanks to lower spectrum payments and lower expenses following the completion of its massive build-out of 3G/4G networks. This should lower funds from operations adjusted net leverage to around 1.5x-1.6x in 2019, from 1.7x in 2018, giving AIS more financial flexibility.

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