The first-quarter results of the two key Thai telecom operators highlight the challenges faced by the industry due to a slowdown in the mobile sector, Fitch Ratings says.
Competition in the local market is likely to become more aggressive, with telcos offering unlimited data packages, putting further pressure on their revenue and delaying earnings recovery.
Fitch believes the third-largest operator, Total Access Communication Public Co Ltd (DTAC; BBB/AA(tha)/stable), will be the most affected due to its large exposure to mobile revenue. In contrast, the largest operator Advanced Info Service Public Co Ltd’s (AIS; BBB+/AA+(tha)/stable) diversification into fixed broadband services should reduce the risk of a slowdown.
DTAC’s service revenue dropped 5.7 per cent year on year in the first quarter of 2019, (2018: -2.8 per cent), but EBITDA (earnings before interest, taxes, depreciation and amortisation) contraction was steeper at 26.3 per cent year on year, as aggressive marketing promotions took a toll on profitability. Meanwhile, AIS’ EBITDA was flat year on year, despite a 2.5 per cent rise in revenue (2018: 3.8 per cent), with its fast-growing fixed-broadband services offsetting the flagging mobile business.
Domestic telecom operators are likely to continue facing pressure on mobile-service revenues, beset by a slowdown in data revenue. The growth in data subscriptions has started to decelerate in the past few quarters due to higher 4G-device penetration. In addition, growth in data usage for existing subscribers is not translating into higher revenue, given the fierce competition in data-tariff offerings.
Revenue from data is not growing sufficiently enough to offset the decline in legacy voice and SMS services, resulting in a drop in overall service revenue over the next two years. Operators may need to cut tariffs further or deepen handset subsidies to accelerate the adoption of data services in the lower-tier segment. The number of 4G-device users is high in Thailand, with DTAC’s subscriber base accounting for 69 per cent and AIS 63 per cent in the first quarter.
However, operators will still need to monetise their data offerings better to achieve revenue growth in the longer term when data penetration approaches saturation. This will require adjustments in data pricing so it moves away from unlimited, large data-allowance packages to a strategy that charges subscribers according to their usage. Service bundling should also help keep customers and boost the average per-user revenue. However, this may be difficult to achieve in a highly competitive market.
Fitch expects DTAC’s market position to strengthen in 2019 after it acquires the 1.8GHz and 900MHz spectra. This should also help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years.
Nevertheless, meaningful network improvements and brand rebuilding may take effect only after a few quarters, suggesting EBITDA recovery will probably only take place next year. The slow recovery will not immediately affect the company’s ratings as its financial leverage remains below Fitch’s negative-rating guideline of 2.5x at 2.2x at the end of the first quarter.
AIS should continue to benefit from its strategy to diversify into fixed broadband, which has shown greater stability and growth prospects compared to the mobile business over the past few years.
Fitch Ratings expects continued growth in overall service revenues, visibility of operating cash flows and a more moderate capex to allow the company to manage its leverage at a level that is commensurate with the current ratings in the medium term.
AIS’ free cash flow is also likely to turn positive this year due to lower spectrum payments and falling capex following the massive build-up of its 3G/4G networks. This should result in a reduction of funds from operations adjusted net leverage to around 1.5x to 1.6x in 2019, from 1.7x in 2018, giving AIS more headroom and financial flexibility to support an increase in marketing expense.