Revenue momentum for Thai telecom operators is likely to slow amid a protracted economic recovery from the third wave of the Covid-19 outbreak. As a result, Fitch Ratings expects muted sector growth in 2021 and high 5G investment to weigh on financial profiles.
Fitch now expects flat service revenue for the Thai mobile sector in 2021, weaker than our previous low-single-digit growth forecast, following a 2.9% decline in 2020.
Mobile sector revenue started to stabilise in the first quarter of 2021 after four quarters of consecutive decline, but the resurgence of Covid in April could result in another contraction in the second quarter in light of slower economic activity and consumption.
Fitch believes local operators will refrain from raising tariffs until macroeconomic conditions improve, due to fear of losing subscribers. The pace of recovery in the second half of 2021 will depend on the speed and effectiveness of vaccine rollouts.
Thailand's economic recovery from the pandemic this year and next is likely to underperform that of other emerging markets in Asia Pacific. Fitch forecasts GDP growth of only 2.9% in 2021 and 4.5% in 2022, after a 6.1% contraction in 2020.
The Thai economy will continue to be weighed down by high reliance on tourism, which could take time to recover. This suggests a challenging operating environment will persist for local telecom operators in the next one to two years.
Fitch expects the industry's free cash flow (FCF) to remain negative in 2021, underscoring a worsening outlook for the sector. Capex intensity (including spectrum payments) will remain high at around 45% of revenue, the same as in 2020, mainly to support 5G rollouts.
Meanwhile, a lack of compelling applications that differentiate 5G value from 4G services suggests that any near-term uplift from 5G revenue is unlikely to be significant.
Muted earnings growth together with high capital expenditure and spectrum payments will raise leverage for market leader Advanced Info Service Plc (AIS), currently rated AA+(tha)/Stable, and third-ranked Total Access Communication Plc (DTAC), rated AA(tha)/Stable.
Fitch believes that telcos will also need to secure additional spectrum, particularly the mid-band 3.5GHz spectrum, to support the 5G rollout, although the availability of the frequency band is uncertain -- as it is currently used by satellite broadcasting services.
Nevertheless, Fitch believes domestic operators will have some flexibility to manage their leverage profiles, including scaling back 5G investment or reducing dividends if demand turns out to be weaker than expected.
Fitch forecasts FFO net leverage (funds from operations to total debt) for AIS will increase slightly to around 1.3 times in the first quarter from 1.0 times in the same period last year. The figure for DTAC will rise to 2.2 times from 2.1 times. Nevertheless, AIS's current low financial leverage should provide sufficient headroom for additional investments.
However, DTAC's narrow rating headroom compared with its negative leverage trigger of 2.3 times and negative pre-dividend FCF suggest it may have less flexibility to fund spectrum investments in the medium term.
Prudent capital preservation, including discretionary shareholder returns, will help DTAC to reserve balance-sheet strength to step up spectrum investment when needed.