The tough economic environment is likely to dent EBITDA growth of Thai telecom operators in 2020, particularly for the third-largest mobile operator Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Negative), says Fitch Ratings.
We believe it would be challenging for DTAC to regain its market share loss and stabilise its earnings in 2H20, as rivals undertake aggressive capex and spectrum investments to widen their lead in network quality. DTAC’s 2.3GHz network rollout over the past year had driven network improvements and a reduction in subscriber losses in 2H19, but this may be short-lived as the two largest domestic mobile operators, Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable) and True Corporation Public Company Limited (True), step up investments in their 2.6GHz networks and 5G rollout.
Fitch believes mobile internet experience and network quality are key factors for subscribers when choosing mobile service providers, as price differentials among telcos start to recede. This was evident from True’s rapid gain in market share over the last few years to become the country’s second-largest mobile operator, in view of its aggressive spectrum and network investments. AIS plans to boost capex to around THB35 billion, from THB23 billion in 2019, mainly to support its 5G rollout. Conversely, DTAC aims to reduce capex to around THB8 billion-10 billion, from THB17.8 billion in 2019. DTAC’s network investments in 850MHz and 900MHz spectrum is likely to be delayed to 2021 due to signal interference issues.
The industry’s service revenue fell 3.6% yoy in 2Q20, given the economic slowdown and the plunge in inbound and outbound tourists in light of the coronavirus pandemic. DTAC’s EBITDA grew by only 1% yoy in 1H20 due to its loss of subscriber market share to True. Meanwhile, AIS’s 3% growth in EBITDA was in line with our expectation.
Fitch expects the industry’s free cash flow to turn negative in 2020, underscoring our negative outlook on the Thai telecoms sector. Capex intensity (including spectrum payments) for Thai telcos is likely to remain high at around 40% of revenue in 2020, due mainly to an increase in spectrum payments. Nevertheless, Fitch believes that telcos 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 high spectrum payments will raise leverage for AIS and DTAC in 2020. We forecast FFO net leverage to increase to around 1.3x and 1.9x, respectively, from 1.0x and 1.7x in 2019. Nevertheless, AIS’s current low financial leverage of 0.8x at end-1H20 should provide sufficient headroom for additional investments.
