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True Corporation

Capital increase (again)

True Corporation Plc (TRUE)

What's new?

Yesterday, TRUE announced a Bt65bn capital increase of 10,077.71m shares—5,648.29m shares in a rights offering (RO) at a ratio of 2.5725: 1 and a price of Bt6.45 apiece (Bt36bn) and a 4,429.43m-share private placement (PP) to China Mobile International Holdings Ltd (China Mobile) at Bt6.45 apiece (Bt29bn). In the case where China Mobile is unable to invest in TRUE for whatever reason, the firm may consider selling the shares reserved for China Mobile into the RO. China Mobile will hold an 18percent stake in True, based on the PP. Of the Bt65bn in proceeds, Bt52bn will be used to repay debt, the rest is for business expansion. The recapitalization represents a share dilution of 41%.

Much lower gearing and interest expenses after cash call

The capital increase will strengthen TRUE's financial position substantially, which should improve its credit rating. We expect interest-bearing debt to dive 55% (from Bt95bn at end-March 2014 to Bt43bn following the cash call) and its equity base to jump from Bt8bn at end-March 2014 to Bt73bn. Hence, the debt-to-equity ratio would dive from 11.9x at end-March 2014 to 0.6x. Its balance sheet would strengthen significantly and—even assuming no decline in interest expenses from the current 6%—the cost of servicing debt in FY15 would drop from Bt3.4bn (in the absence of the cash call) to only Bt400m.

Little, or no scope for synergies with China Mobile

Management claims synergistic benefits as a result of China Mobile's purchase of an 18percent stake in TRUE in such areas as procurement of handsets/devices/telecoms infrastructure, international roaming and exchanges of content and applications. We are skeptical about such claims.

Net negative impact of the cash call on our DCF valuation

We estimate that the 41percent share dilution will have a 13% net negative impact on our DCF-derived target price. Our DCF target price declines from Bt7.7 to Bt6.7. We have adjusted our core net loss projections to Bt6.5bn for FY14 (20percent shallower than our earlier forecast) and to Bt2.9bn for FY15 (51percent shallower), which reflects lower interest expense assumptions.

Only a short-term positive for TRUE

Our HOLD rating stands. We expect TRUE's debt level to rise substantially over the next few years, led by planned CAPEX for two digital TV channels and the firm's intention to bid for 1800MHz and/or 900MHz bandwidth in 2H14. We remain skeptical over management guidance that the core operation will turn around in 2H14 or FY15 on lower OPEX—running two digital terrestrial TV channels is unlikely to allow OPEX to decline much.

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