Moody's: True Corp's Weaker Than Expected Results Can Be Accommodated in its Ratings
Moody's Investors Service says True Corp's 2012 results can be accommodated in its ratings despite building pressures on margins and leverage. There is no immediate impact on True Corp and True Move's B2 ratings and stable outlooks.
True Corp's consolidated service revenue grew 8.9% YoY to THB61.9 billion, with True Mobile Group leading revenue growth of 14.4% YoY, on the back of an expanding 3G subscriber base and increases in non-voice revenue.
Reported EBITDA margins declined to 21.8% from 26.9% last year, mainly on account of significant increases in selling and marketing expenses and other customer acquisition costs for True Mobile Group, and increased content cost at TrueVisions.
"The increase in customer acquisition costs is within expectations, as True Corp attempts to leverage its early-mover advantage for 3G services under "TrueMove H" and gain market share, before competition further intensifies with the roll-out of services by all three operators under the new 2.1GHz licenses," says Nidhi Dhruv, a Moody's Analyst.
TrueMove H had 2.9 million subscribers as of December 2012, substantially short of the company's target of 4.0 million, although this was partially due to constraints on availability of mobile numbers. Over the near-term we expect an intensely competitive operating environment for 3G service operators in Thailand given a level playing field now exists with all three operators having equal allocations of 3G spectrum. This will test True Corp's execution strategy, and will continue to pressure margins.
True Corp's leverage as measured by reported debt/EBITDA was higher than expected at 6.1x on account of higher debt-funded capex of THB19.3 billion for expansion of TrueMove H's 3G services, and the payment of THB7.2 billion (including VAT) towards the first 50% installment of the 2.1GHz spectrum fee.
As per license conditions, all license holders, including True Corp, must expand 3G network coverage to 50% of the population within the next two years, and to 80% of the population within four years. True Corp has guided to consolidated capex of THB26.5 billion for 2013, part of which is a spill-over from last year owing to delays in the 3G rollout.
"Further network expansion capex and the balance payment for spectrum fees, both of which will be primarily debt-funded is likely to keep adjusted gross leverage in the range of 5.5-6.0x over the next 1-2 years, although this can be accommodated in the current rating given the regulatory and operating certainty provided," adds Dhruv, also Lead Analyst for True Corp and True Move.
Issuance of the 3G licenses brings certainty to True Corp's operating platform ahead of the expiration of its existing 1800MHz concession agreement with CAT in September 2013; its 850MHz 3G reseller agreement with CAT is also being renegotiated as a result of regulatory scrutiny.
Moody's also notes that the cumulative license fees for the 2.1Ghz licenses at 5.25% are much lower than the 30% revenue sharing arrangements under True Move's existing concession agreement and the cost-plus arrangement under Real Move's contracts with CAT. The lower fees should support operating margins and help in moderate de-leveraging at the True Corp level over the medium term.
Nonetheless, additional capex requirements coupled with increased marketing and operating costs will result in negative free cash flows at least over the next two years.
Moreover, the B2 ratings continue to encapsulate True Move and True Corp's exposure to an evolving and politicized regulatory environment. Moody's also continues to remain concerned about execution risks for the HSPA 3G upgrade, the migration of subscribers from the CDMA network to the new HSPA platform and True Corp's competitive strategy for rolling out 3G services under the 2.1GHz spectrum.