We have downgraded our DTAC rating from BUY to HOLD, as we believe the stock is now fully valued (despite anticipation of stronger fundamentals in 2H14). Its recent share price rally has already priced in a new special quarterly DPS, FY14-18 (the first payout will be for 1Q14). We recommend switching to ADVANC, for its cheaper valuation—an FY14 PER of 16.7x against DTAC’s 21.3x.
YoY core earnings drop expected for 1Q14
We estimate a Bt3.02bn net profit for 1Q14, flattish YoY but up 63% QoQ. Stripping out FX and extra items—net extra expenses of Bt523m in 1Q13 and Bt985m in 4Q13—core profit would be Bt3.12bn, down 10% YoY but up 4% QoQ. The YoY core profit drop is attributable to the effect of heavier marketing expenses, network depreciation & amortization, network OPEX and a dip in service income (excl. IC), which would have offset the effect of lower regulatory costs incurred under the 3G-2.1GHz license. The expected modest QoQ rise is due to drops in marketing expenses and regulatory costs.
Network OPEX expanded by 26% YoY and 1% QoQ, according to our model. A rise of 43% YoY and 3% QoQ in depreciation and amortization expenses is anticipated, due to an accelerated buildout of 2.1GHz cell sites—7,500 sites at end-March, up from 5,900 sites at YE13. We assume that regulatory costs would have fallen by 28% YoY and 12% QoQ on subscriber migration and 2.1GHz cell site expansion.
Total service revenue (excl. IC) dipped by 1% YoY and 3% QoQ, we believe, led by declining voice income (down by 10% YoY and 2% QoQ), which would have outweighed the effect of higher nonvoice revenue (by up 28% YoY and 2% QoQ). Note that YoY 1Q14 nonvoice revenue growth decelerated compared with 4Q13 growth (up by 42% YoY and 6% QoQ rises). We assume that sales revenue rose 14% YoY but dived 39% QoQ.
The 2H14 earnings recovery and the 1800MHz auctioning
Service income (excl. IC) is likely to be relatively weak in 2Q14 ahead of an earnings recovery in 2H14, by which time we expect the domestic economy to improve, eased competition for sub adds and greater realized regulatory cost savings. DTAC targets having 90% population coverage for its 2.1GHz network by YE14. It guides that it will build out 11,000 3G-2.1GHz cell sites by end-September (~25% more than its earlier guidance for end-Sept). There could be future incremental value from the auctioning of 25.2MHz x2 of 1800MHz bandwidth, tentatively scheduled for August 2014, if DTAC were to win a chunk of it.