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Advanced Info Service

Profit to rebound qoq in 4Q13 and 2014. "BUY"

Advanced Info Service Plc (ADVANC)

Higher income than expense from lower revenue sharing cost,boosting 4Q13 profit

As a result of the political unrest and Thailand’s unhealthy economy, 4Q13 voice

service income is projected to grow by only 1.6%qoq, lower than seasonal usual.

However, thanks to nationwide coverage of the new 3G network under 2.1 GHz

license, 4Q13 revenue from data service is projected to leap by 10%qoq, boosting

4Q13 service revenue (excluding IC) by 4%qoq. Moreover, the launching of the new

model of iPhone is likely to increase mobile phone sales volume by 75%qoq. Thus,

4Q13 total income (excluding IC) is projected to grow by 12.4%qoq (or +B3.9bn) to

B35bn. On the contrary, cost of service and selling and administrative expense

(excluding IC) is projected to increase from 3Q13 by B3.5bn, less than the income.

Expenses from investment on 3G network and sales promotion and advertisement cost

are projected to increase. However, it would be negated by a decrease in revenue

sharing cost (from 25% revenue sharing cost from 2G network concession to 5.25%

from new 3G network license), as ADVANC has migrated 14 million subscribers (34%

of total subscribers) to new 3G network (from 10.4 million at end-3Q13). Thus, the

cost is likely to stay unchanged qoq, whereas income base would increase. Overall,

ADVANC’s 4Q13 net profit is projected at B8.9bn, growing by 6.0%qoq. FY2013 net

profit is expected at B36bn, growing by 4.1%yoy, versus our forecast of 3.9%.

- Increasing 3G subscribers to boost 4Q13 profit. To continue growing in 2014

Purchasing power has been pressed by the political unrest, so ADVANC’s FY2014

income is likely to grow at a slower rate than expected. However, ADVANC’s FY2014

net profit would grow more than 10%yoy. The average of over 19 million subscribers

would be migrated to new 3G network under 2.1 GHz license in 2014 (versus the

average of seven million in 2013), significantly reducing revenue sharing cost from

2013 (at end-2014, the number of migrated subscribers is projected to reach 24

million, or 61% of total subscribers). We maintain our FY2014 profit forecast at B43bn,

growing by 14%. ADVANC’s 2014 targets would be announced along with 4Q13

earnings report.

- To book lower-than-expected DPC impairment cost. Attractive dividend yield and upside

Profit is likely to rebound in 4Q13, possibly relieving concern on the effect of 3G

network investment on ADVANC’s profit. Moreover, dividend yield might be higher than

our forecast. It was previously projected that ADVANC might recognize the impairment

of a subsidiary DPC (the concessionaire of 1800MHz) at the maximum of B4.5bn, as

the operation expires on 15 September 2014. However, due to a change in business

structure, DPC has faced lower loss, so lower-than-expected expense from DPC

impairment would be recognized by ADVANC (depends on auditor). Thus, end-2013

retained earnings from separate financial statement, which can legally be paid as

dividend, would not be as much lower than retained profit in consolidated financial

statement as concerned. 2H13 DPS is expected at B5-5.5 (higher than B4.8 forecast;

with 2.8-3.1% dividend yield). FY2014 fair value at B315 implies 61% upside.


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