We have upgraded our rating from HOLD to BUY, as ADVANC’s valuation gap has increased, due to its recent share price fall (the 1H14 earnings outlook remains subdued). We believe that downside risk from the current level is low, given dividend yield support of 6.5-7%.
Flattish core profit expected for 4Q13
We estimate an Bt8.69bn net profit for 4Q13, up by 3% YoY and 4% QoQ. Stripping out FX, core earnings would be Bt8.75bn, flattish YoY but up 4% QoQ. In YoY terms, we believe that service income rose slightly, while interest and tax expenses should have declined, offsetting the effect of sharply higher marketing expenses. The modest QoQ core profit rise is attributable to high season in the face of flattish OPEX. The extent of the fourth-quarter high season was probably softer in 4Q13 than in the final quarter of any previous year since 2009, due to the prevailing weak consumption spending environment.
Service revenue (excl. IC) should post growth of 2% YoY and 3% QoQ, led by strong expansion in nonvoice receipts (up by 22% YoY and 7% QoQ). We assume that voice income will post a drop of 7% YoY and 1% QoQ—the popularity of the Line app seems to be affecting call traffic as much as weak consumption spending. We assume that sales revenue rose by 5% YoY and 73% QoQ on the debuts of the iPad Mini and the iPhone 5S.
Network OPEX, general administrative, depreciation and amortization expenses should have been flattish QoQ. But marketing expenses are estimated to have shot up 40% QoQ, led by much heavier 3G-2.1GHz marketing spend. We expect greater QoQ net regulatory cost savings—the effect of cheap license fees should have outweighed the effect of higher revenue-sharing payments on roaming fees. ADVANC is assumed to have booked an investment impairment on a subsidiary, DPC, of at least Bt1bn to its 4Q13 unconsolidated income statement; that impairment will impact somewhat on the dividend for 2H13.
We estimate that at YE13 3G-2.1GHz subscribership totaled 13-14m and network coverage was 70% (and rise to 90% by June 2014).
Subdued 1H14 outlook, but the prospects for 2H14 are stronger
Intensifying competition for 3G sub adds within the industry and the weak state of the economy will make for subdued 1H14 service revenue growth, but income should expand much more strongly in 2H14. Overall OPEX—marketing, network OPEX and depreciation and amortization—and CAPEX will jump YoY through FY14 with the commissioning of another 10,000 3G-2.1GHz sites in FY14 (there were 10,000 at YE13). But we expect major net regulatory cost savings in 2H14. Hence, hefty YoY earnings growth should manifest in 2H14.