I maintain my “Neutral” rating on Thailand-listed telecommunications company, True Corporation Public Company Limited (OTC:TCPFF) [TRUE:TB], the second-largest mobile operator in Thailand.
There are concerns that Advanced Info Service could have an edge in the 5G era, as it has acquired more 5G spectrum than competitors; but True Corporation has refuted such claims. True Corporation’s financial position has deteriorated in the past year, but it still needs to fund capital expenditures. True Corporation’s funding options include issuing new bonds denominated in Thai baht or USD, injecting assets into Digital Telecommunications Infrastructure or selling shares in the telecommunications infrastructure fund. Nevertheless, the current volatile capital market conditions could make it challenging for True Corporation to raise funds. The company also continues to face intense competition in the mobile and broadband segments, as evidenced by the declining ARPUs (Average Revenue Per User) on a QoQ basis.
In addition, while True Corporation’s share price has declined significantly in the past three to four months in tandem with the broad market sell-down, the stock is still trading way above 2008-2009 Global Financial Crisis valuation levels. As a result, a “Neutral” rating for True Corporation is fair.
This is an update of my prior article on True Corporation published on December 4, 2019. True Corporation’s share price has fallen by close to -44% from Bt4.34 as of December 2, 2019 to Bt2.44 as of March 16, 2020. True Corporation currently trades at 7.1 times trailing twelve months EV/EBITDA and 6.9 times consensus forward next twelve months EV/EBITDA. In comparison, True Corporation traded as low as 4.1 times trailing twelve months EV/EBITDA and 4.2 times consensus forward next twelve months EV/EBITDA during the 2008-2009 Global Financial Crisis.
Readers are advised to trade in True Corporation shares listed on the Stock Exchange of Thailand with the ticker TRUE:TB where average daily trading value for the past three months exceeds $7 million and market capitalization is above $2.5 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers, Fidelity, Charles Schwab, or local brokers operating in their respective domestic markets.
5G Spectrum And Capital Expenditures
Thailand’s first 5G spectrum auction was concluded in mid-February 2020 and True Corporation bid successfully for 17 5G spectrum licenses. These included nine licenses in the 2600MHz range and eight licenses in the 26GHz range which cost Bt17.9 billion and Bt3.6 billion respectively. In comparison, True Corporation’s peers and competitors, Advanced Info Service Public Company Limited (OTCPK:AVIFY) (OTCPK:AVIVF) [ADVANC:TB] and Total Access Communication Public Company Limited (OTCPK:TACYY) (OTC:TACJF) (OTC:TCCMF) [DTAC:TB] or DTAC, won 23 and two 5G spectrum licenses respectively.
There are concerns that Advanced Info Service could grab market share from True Corporation and DTAC in the new 5G era, as Advanced Info Service has acquired significantly more 5G spectrum compared with its peers.
Notably, Advanced Info Service won 12 licenses for the high-frequency 26GHz range, compared with eight licenses on the 26GHz range for True Corporation. At the company’s 4Q2019 earnings call on March 2, 2020, True Corporation referred to Advanced Info Service’s aggressive bidding as “a very good marketing gimmick.” True Corporation also claimed that “there is actually no competitive advantage” for Advanced Info Service with respect to having more licenses for the 26GHz range, as there are very limited applications and solutions meant for the high band frequencies.
Advanced Info Service also won one license in the 700MHz range at the recent spectrum auction in February 2020, while True Corporation did not win any license in the 700MHz range. Similarly, there are concerns if Advanced Info Service will gain an edge over True Corporation as a result. True Corporation emphasized at the company’s recent 4Q2019 results briefing on March 2, 2020 that “low-band frequencies are basically for coverage.” In the company’s Management’s Discussion and Analysis for FY2019 released on February 28, 2020, True Corporation stressed that it has the “industry’s largest inventory of low band frequencies (700MHz, 850MHz and 900MHz).”
Notably, the costs relating to the acquisition of the 5G spectrum licenses will have a limited impact on True Corporation’s cash flow in the near-term. This is because the payments for the new 5G spectrum licenses are staggered, with True Corporation and the other telecommunications companies only required to pay 10% of the total 5G spectrum license cost in the next five years.
Furthermore, True Corporation has guided for capital expenditures in FY2020 to be at a similar level to FY2019, despite the fact that 5G network roll-out in Thailand is expected to commence this year. The company explained at its 4Q2019 earnings call on March 3, 2020 that because capital expenditures are not rising in the 5G era because “the 5G spectrum can massively offload 4G capacities.” In other words, the new 5G spectrum can support both 5G deployment and 4G capacity requirements.
As highlighted in the preceding section, it seems that license payments and capital expenditures relating to 5G will not have a major negative impact on True Corporation’s cash flow, as per earlier expectations.
However, True Corporation still has to fund capital expenditures and other operating expenses, and the company’s financial position has deteriorated in the past year. True Corporation’s net debt-to-EBITDA doubled from 2.3 times in FY2018 to 4.6 times in FY2019, while its net gearing (net debt divided by equity) increased from 1.0 times to 1.2 times over the same period. Furthermore, True Corporation’s headline net debt-to-EBITDA is expected to increase in FY2020, due to the adoption of new financial reporting standards (IFRS 16 on leases) which recognize operating lease liabilities as debt.
More importantly, True Corporation allayed concerns regarding new equity fund raising in the form of either share placements or rights issues. At the company’s 4Q2019 earnings call on March 2, 2020, True Corporation stated that it has “a lot of funding alternatives” and the company is not considering new equity fund raising now.
Apart from issuing new bonds denominated in Thai baht or USD, Thailand-listed telecommunications infrastructure fund Digital Telecommunications Infrastructure (OTC:TTMMF) [DIF:TB] has a significant role to play in True Corporation’s future funding options.
True Corporation has a 28.9% stake in Digital Telecommunications Infrastructure, and the company has raised funds in the past by either selling assets to Digital Telecommunications Infrastructure or selling shares in Digital Telecommunications Infrastructure. True Corporation sold 788 telecommunications towers and 1,795 kilometers of fiber optic cables for to Digital Telecommunications Infrastructure in August 2019 for approximately Bt15.7 billion. True Corporation also raised approximately Bt1.6 billion in December 2019 via the sale of 105.8 million shares of Digital Telecommunications Infrastructure at Bt15.30 per share.
Nevertheless, the current volatile capital market conditions could make it challenging for True Corporation to raise funds. For example, Digital Telecommunications Infrastructure’s share price has declined by approximately -18% to Bt12.50 as of March 16, 2020, since the company’s prior sale of shares in the telecommunications infrastructure fund in December 2019.
Intense Competition In The Mobile And Broadband Segments
True Corporation also continues to face intense competition in the mobile and broadband segments.
The company’s mobile ARPU (Average Revenue Per User) declined -0.5% QoQ to Bt209 in 4Q2019, with prepaid ARPU down -3.5% QoQ at Bt111 in the recent quarter. True Corporation’s mobile ARPU could continue to be on a downward trend, if the company and its competitors maintain high handset subsidies to grab market share.
Similarly, True Corporation’s broadband ARPU decreased -1.0% QoQ and -1.7% YoY to Bt567 in 4Q2019. True Corporation is the market leader in the Thailand broadband market, and Advanced Info Service poses the most serious competitive risk to the company.
Advanced Info Service has set an ambitious five-year target of decreasing revenue contribution from its core mobile business segment from more than 90% currently to 50% by 2024, and this is largely reliant on the growth of Advanced Info Services’ fixed broadband business. Advanced Info Service is the fourth-largest player in Thailand’s fixed broadband market, and it has targeted to be among the top three players by 2022.
True Corporation trades at 7.1 times trailing twelve months EV/EBITDA and 6.9 times consensus forward next twelve months EV/EBITDA based on its share price of Bt2.44 as of March 16, 2020. As a comparison, the stock’s historical five-year and 10-year average forward EV/EBITDA multiples were 9.5 times and 8.9 times respectively. True Corporation traded as low as 4.1 times trailing twelve months EV/EBITDA and 4.2 times consensus forward next twelve months EV/EBITDA during the 2008-2009 Global Financial Crisis.
In terms of comparable peer valuations, Advanced Info Service is valued by the market at 7.6 times trailing twelve months EV/EBITDA and 7.1 times consensus forward next twelve months EV/EBITDA; while DTAC trades at 6.6 times trailing twelve months EV/EBITDA and 4.5 times consensus forward next twelve months EV/EBITDA.
True Corporation offers a trailing twelve months dividend yield of 3.7% and a consensus forward FY2020 dividend yield of 1.1%.
The key risk factors for True Corporation include higher-than-expected capital expenditures as a result of 5G network roll-out, a failure to raise funds to finance capital expenditures, and stiffer-than-expected competition in the mobile and broadband markets in Thailand.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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