State telecom TOT expects to turn a profit in 2019 after three straight years of heavy losses, helped by its deal with DTAC

TOT

Plc expects to turn a profit in 2019 after three straight years of heavy losses, helped by a recent mobile partnership deal with Total Access Communication (DTAC).

DTAC, meanwhile, has eased spectrum constraints made worse by the lack of new auctions for bandwidth in the near future.

TOT president Monchai Noosong said the state enterprise is pinning its hopes on mobile partnership deals with private companies, including Advanced Info Service (AIS), to help create new revenue streams.

With the expiry of AIS’s concession in 2016 — one which generated up to 20 billion baht a year in revenue — TOT took a loss of 5.8 billion baht on revenue of 30.8 billion in 2016. The loss is expected to widen this year.

Mr Monchai said the partnership agreement between TOT and DTAC is projected to generate almost 15 billion baht for TOT in 2019 — 10 billion from AIS and another 5 billion from DTAC’s deal.

He said an official contract is expected to be constructed by June, with approval by TOT’s board estimated in July. The contract is expected to be signed in the last quarter of 2017.

Lars Norling, chief executive of DTAC, called the partnership a win-win resolution. DTAC made a reasonable proposal to TOT in exchange for the widest bandwidth on a single band at 60 megahertz, he said.

“This deal comes at the right time,” Mr Norling said. The TOT board selected DTAC on Tuesday as its partner for 4G services on its 2300MHz spectrum after almost six months of competitive bidding among the three major mobile operators.

Mr Monchai said the bandwidth will create sustainable growth for both parties, capitalising on exploding data consumption.

DTAC, through subsidiary DTAC TriNet, has committed to building over 20,000 4G base stations nationwide to cover 80% of population.

The company offered to pay an annual fixed payment of 4.51 billion baht to TOT for 60% of its total network capacity. TOT will rent 4G equipment from DTAC TriNet to use the remaining 40% of network capacity to provide its own 4G service.

Fitch Ratings believes DTAC’s market position will be strengthened, as its relatively weak spectrum portfolio has constrained business.

But additional contract payments, including potentially high prices for the upcoming 1.8GHz spectrum auction scheduled for 2018, plus elevated capital expenditure (capex) to build out a network, could put more pressure on DTAC’s earnings, cash flow and financial leverage in the medium term.

Fitch expects DTAC’s earnings before interest, tax, depreciation and amortisation to decline 5% to 24-25 billion baht in 2017, in part because of payment for the 2.3GHz contract.

In addition, a high upfront spectrum payment in 2018 and the likely elevated capex will raise net debt, which could heighten DTAC’s financial leverage during the period.

DTAC has moderate financial leverage and suspended dividend payments for 2016 performance, leading Fitch to forecast DTAC’s funds flow from operations-adjusted (FFO) net leverage remaining below 2.5 times in the next two years (compared with 1.9 times in the first quarter this year), in line with current ratings.

“We may consider a negative rating action should the company’s FFO-adjusted net leverage be sustained above 2.5 times because of intense competition in the upcoming spectrum auction, if it causes DTAC to pay significantly more than expected,” Fitch said.

Fitch said the additional 2.3GHz of spectrum and further investment should improve DTAC’s network quality, stemming declines in market share and revenue.

DTAC has the weakest spectrum portfolio of the three major mobile operators and has been the least aggressive in network investment because of spectrum constraints. These factors were the key reasons for DTAC’s continued loss of market share the past few years.

The company competes mainly on price and generous data allowances to defend market share.

“We believe DTAC may be less aggressive on pricing and more focused on service quality once its spectrum and network quality improve,” Fitch said. “DTAC’s network capex is likely to increase over the medium term as the company strengthens its network.”

Fitch believes DTAC will need more spectrum over the next two years — on top of TOT’s 2.3GHz spectrum — to replace the 35MHz of spectrum that is part of the 2G concession expiring in 2018.

DTAC is likely to take part in the 1.8GHz spectrum auction expected to occur in 2018.