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True Corporation

FY14 turnaround guidance looks too optimistic

True Corporation Plc (TRUE)

Investment thesis

Following the analyst meeting, we are skeptical about TRUE's guidance—that it will recruit a strategic partner, complete a private placement in 2H14 and turn around to black ink in FY14 through a 10% OPEX cut and top-line growth of 8-9%. Our HOLD rating stands, premised on a persisting weak bottom-line profile for FY14-15.

Turnaround to a core profit in FY15—too optimistic

Management targets a bottom-line turnaround (and a shallower core loss) in FY14, led by a Bt5bn gain from the sale of another 3,000 towers to TRUEIF and a 10% cut to OPEX (excluding depreciation and amortization expenses). Moreover, it aims for core operational black ink in FY15. The areas of cost reduction are marketing, distribution and IT, which will start in 1Q14. TRUE will book a further Bt4bn gain from the sale of another 3,000 towers to TRUEIF in FY15. It targets 8-9% top-line growth for FY14—True Mobile up 13-17%, True Online (excluding fixed-lines, public phones and PCT) up 21-23% and True Visions up 7-9%—and EBITDA margin of 40% in FY16, up from 17% in FY13.

Cutting OPEX by 10% (Bt8bn) this year presents a major challenge, we believe, given high marketing expenses tied to 3G-on-2.1GHz sub acquisition. The 8-9% top-line growth and the 13-17% True Mobile revenue growth targets also seem too bullish, given the prevailing economic slowdown. The remaining 2G network assets had a book value of Bt16bn at YE13; we assume that amortization costs will rise by Bt300m/month on accelerated amortization in 9M14. We forecast an Bt8bn net loss and no net extra gains for FY14 (the Bt5bn gain from TRUEIF will be offset by a Bt5bn 2G network asset impairment).

Par reduction to wipe out retained loss in order to pay dividend

TRUE will cut its paid-up capital through a par reduction, which it will use to wipe out its YE13 retained losses of Bt65bn. Presumably that would happen ahead of the private placement to a new strategic partner. After the par reduction, the firm would no longer be legally prohibited from paying dividends to shareholders. The cash call might take place ahead of 2H14, given TRUE's thin YE13 equity base of just Bt4.7bn. It would seem unlikely that the firm could pay a dividend in FY15 unless it could deliver a net profit for FY14.

Moody credit rating downgrade to junk status

On Thursday, Moody's Investors Service downgraded its corporate rating for True Corp and for True Move's senior unsecured bond ratings from B3 to Caa1 (junk bond status), premised on more fragile business and financial profiles. The rating agency expects deeper negative free cash flows on heavier 3G CAPEX and a spectrum fee payment for 1800MHz bandwidth (the NBTC plans to auction 1800MHz bandwidth this year). Moody's rating downgrade may mean higher financial costs in the future.

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