Fitch downgrades DTAC's outlook on leverage questions

Fitch downgrades DTAC's outlook on leverage questions

Fitch Ratings has revised its outlook for Total Access Communication Plc (DTAC) to negative from stable to reflect expectations that the mobile phone service provider's financial leverage by the year-end will increase to a level that is not commensurate with current ratings.

The credit rating agency estimates DTAC's financial leverage measured by funds from operations (FFO) adjusted net leverage will increase to above 2.5 times by the end of 2019, following a settlement payment of 9.5 billion baht over DTAC's dispute with CAT Telecom in early 2019.

DTAC's financial leverage is likely to be sustained above 2.5 times over the next two years because of the likelihood the company will face challenges to regain market share and stabilise earnings, according to a Fitch statement.

DTAC's earnings before interest, tax, depreciation and amortisation (ebitda) would need to improve towards 30 billion baht over the next two years (versus the last 12 months to the end of June at 26 billion baht) on stronger revenue growth, reversal of subscriber churn and margin improvements for net leverage to trend below 2.5 times, which would lead to a revision in its outlook to stable.

Fitch's rating-case forecast assumes a slow recovery in DTAC's ebitda in 2020-21 to 26-27 billion baht from an expected 25 billion in 2019.

Fitch recognises the long-term benefits of the company's aspiration to strengthen network coverage and quality in acquiring subscribers, but this may take time to translate into meaningful improvement in ebitda.

DTAC's service revenue continued to decline by 5.3% year-on-year in the three months through June but improved 1.6% quarter-on-quarter, with ebitda affected by the payments to CAT for equipment rental and to TOT Plc for use of the 2.3GHz spectrum.

Fitch predicts DTAC's service revenue to decline by a low single-digit rate in 2019, with ebitda margin dropping to 36% in 2019 from 37.8% in 2018.

Fitch expects DTAC's free cash flow to be negative between 2020 and 2021, as FFO of 23-25 billion baht a year may not be enough to meet an annual capex of 14-15 billion and spectrum payments of 9-13 billion a year.

FFO adjusted net leverage is likely to increase to 2.7 times in 2020 and 2021 from Fitch's expectation of 2.6 times at the end of 2019.

The pace of deleveraging will hinge on cash flow improvement from the company's ability to regain lost market share and drive subscriber growth.

Fitch expects DTAC to benefit from the acquisition of 900MHz and 1.8GHz spectrum in late 2018 and 700MHz spectrum in June 2019.

This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years.

DTAC has lost market share because of intense price competition, slipping to third place in Thailand's mobile operator market after True Corporation Plc's mobile unit leapfrogged it in the first quarter of 2017.

"We expect DTAC's market share to stabilise at 23-24% over the medium term (in 2018 it is 24%) amid its improvement in network coverage and a moderation in market competition," Fitch said.

Meanwhile, Fitch has affirmed the long-term foreign- and local-currency issuer default ratings (IDR) at BBB+ with a stable outlook for Advanced Info Service Plc (AIS) and its subsidiary Advanced Wireless Network Co Ltd (AWN).

The agency also affirmed AIS's and AWN's national long-term rating at AA+(tha) with a stable outlook.

AIS's and AWN's ratings are equalised to reflect the strong links between the two companies, in line with Fitch's parent-and-subsidiary rating linkage criteria.

AIS fully owns AWN, enabling it to control the subsidiary's strategy, financial policy and investments.

AWN is the main subsidiary within the group, accounting for some 94% of group revenue and 80% of ebitda as of last year.

AWN is of strategic importance to its parent as the operator of AIS's licensed mobile business. AWN was awarded 2.1GHz, 1.8GHz and 900MHz licences, and it participated in the 700MHz spectrum allocation in June 2019.

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