Service revenue for Thai telecom operators will likely decline modestly in 2020 due to a slowing economy amid the coronavirus pandemic, according to Fitch Ratings.
Fitch expects the sector's free cash flow to turn negative in 2020, as higher capital expenditure (capex) and spectrum payments exceed cash flow from operations.
Fitch predicts mobile service revenues for Thai telecom operators to decline 2-3% in 2020 (after 3.6% growth in 2019), which would still outperform Fitch's GDP forecast of a 5.1% contraction for Thailand.
The ratings agency believes that the telecom sector will be more resilient in a downturn relative to other sectors, given the essential nature of its services.
Mobile service revenue grew at a modest pace of 1.9% year-on-year in the first quarter of 2020 but declined 2.1% quarterly. The sector grew 3.6% in 2019.
International roaming revenue, which accounted for 2% of service revenue, fell by 22% year-on-year in the first quarter, due to the plunge in inbound and outbound tourists since February.
Quarterly revenue was also affected by a slowdown in new subscriber acquisition and slow migration of existing subscribers to higher-margin postpaid mobile services from low-margin prepaid ones, due to the temporary closure of telecom service shops in late March 2020 as part of measures to curb the pandemic.
Total mobile subscribers in the first quarter of 2020 shrank 2.4% from Q4 2019 and 1% year-on-year, compared with the fourth quarter of 2019 where they grew 1.4% quarterly.
Fitch expects service revenue in the second quarter of 2020 to decline further should the economic slowdown deepen in April and May. The temporary closure of some non-essential businesses will continue to put pressure on enterprise spending, while a higher unemployment rate could weaken consumer sentiment.
Growth in telecom revenue is likely to lag the increase in data consumption, with operators offering tariff discounts and reintroducing unlimited data plans to bolster data consumption.
Fitch predicts the industry's free cash flow to turn negative in 2020, underscoring a negative outlook on Thai telecom. Nevertheless, telecoms will have some flexibility to manage their leverage profiles, including scaling back 5G investment or reducing dividends if demand is weaker than expected.
Fitch believes that high capex and spectrum payments will raise leverage for Thailand's largest mobile operator, Advanced Info Service (AIS), and the third-largest operator, Total Access Communication (DTAC), in 2020.
AIS has said it will increase capex (excluding spectrum payment) to 35-40 billion baht in 2020 from 23 billion baht in 2019, mainly to support its 5G network rollout.
While DTAC has yet to provide its full-year capex guidance for 2020, citing uncertainties about the operating environment, Fitch expects the company to maintain capex (excluding spectrum payment) at 15-18 billion baht in 2020.