Fitch Ratings (Thailand) Limited has assigned a 'AA+(tha)' rating to Advanced Info Service Public Company Limited's (AIS; AA+(tha)/Stable) proposed senior unsecured debentures of up to THB10 billion. The proceeds will be used as working capital, to refinance existing debt and to fund capex. The proposed debentures constitute direct, unsecured, unconditional and unsubordinated obligations of the company and are rated at the same level as AIS's National Long-Term Rating.
AIS's ratings reflect its solid market position as Thailand's largest mobile-phone operator and its conservative financial profile. Fitch expects AIS to continue to generate solid earnings, as well as maintain a market share and financial leverage consistent with its current ratings.
KEY RATING DRIVERS
Ratings Equalised: The ratings reflect AIS's 'High' strategic and operational incentives to support its mobile subsidiary, Advanced Wireless Network Company Limited (AWN, AA+(tha)/Stable), in line with Fitch's Parent and Subsidiary Linkage Rating Criteria. This is underpinned by a significant 96% and 76% contribution from AWN's mobile and broadband businesses to the group's revenue and EBITDA in 2021, respectively.
We regard management and brand overlap as 'High'. AIS fully owns AWN, enabling it to control AWN's strategy, financial policy and investments, with the common AIS brand for products sold across its mobile, broadband and content businesses.
Revenue Recovery: Fitch expects AIS to benefit from Thailand's gradual recovery from a relatively weak economy in 2020-2022. We forecast gross domestic product to grow by 4.5% in 2023. The increase in business activity and tourism recovery should support AIS's service revenue in 2023, which we forecast as at 3%-4% in 2023 (2022: 1.6% growth).
Margin Pressure: Lower average revenue per user will put pressure on AIS's profitability in 2023. Revenue will be higher in 2023, but we forecast EBITDA to remain at THB74 billion-75 billion (2022: THB74.5 billion). Mobile operators are likely to maintain a low-price strategy for the pre-paid segment, even after the merger of True Corporation Public Company Limited (TRUE) and Total Access Communication Public Company Limited. We believe firms will remain cautious in raising tariffs to avoid losing market share, as the economy has yet to recover significantly.
Broadband Business Expansion: Fitch believes the acquisition of fixed-broadband operator Triple T Broadband PLC (TTTBB) is in line with AIS's pursuit of a sustainable competitive position and profitable growth amid a slowing mobile business. We expect broadband's post-acquisition revenue to reach around 18% of the total, from 8% in 2022. The deal will also solidify AIS's market position as Thailand's second-largest fixed-broadband operator, raising its broadband market share to around 35%, from 16% in 2022; this is close to the 38% share of the largest operator, TRUE.
Sufficient Rating Headroom: AIS's free cash flow (FCF) is likely to stay positive at around THB3 billion in 2023 as cash flow from operations should be enough to cover capex of around THB30 billion, spectrum payments (around THB11 billion) and dividend payments (around THB20 billion). Fitch believes low financial leverage, with EBITDA net leverage of 1x at end-2022, will provide sufficient headroom to support higher capex and additional spectrum investment in the medium term.
The proposed debt-funded acquisition of TTTBB will increase AIS's net leverage by about 0.5x, without taking into consideration any earnings from the acquired asset. We expect EBITDA net leverage to reach around 1.5x at transaction closing in 2Q23, from 1.0x at end-2022. This is still below the 1.8x level where we would consider a rating downgrade, although the rating headroom will narrow.
Leading Market Position: Fitch believes AIS will be able to maintain its service-revenue market share of 45%-50% in the medium term (2022: 47%). It benefits from economies of scale due to its large subscriber base, a strong brand and extensive network coverage. AIS is also diversifying into fixed-broadband (FBB) services, with revenue rising strongly over the past few years, leading to a market share of around 16% in 2022. Nevertheless, FBB revenue contribution remained low at around 8% of AIS's total service revenue in 2022.
AIS's credit profile is stronger than that of Thai Beverage Public Company Limited (ThaiBev, AA(tha)/Stable), Thailand's largest beverage producer with a strong market position in spirits and a leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar. They both have comparable business profiles as market leaders in their industries. AIS has narrower geographical diversification, but its National Long-Term Rating is higher than that of ThaiBev by one notch due to AIS's lower financial risk.
AIS's National Long-Term Rating is one notch lower than that of PTT Public Company Limited (AAA(tha)/Stable), the largest fully integrated oil and gas company in Thailand, because AIS has a weaker business profile. PTT's business is larger and more diversified. It is the sole operator in mid- and downstream gas operations, one of Thailand's major upstream producers, and a dominant company in the oil and petrochemical industries. Both have conservative financial profiles with EBITDA net leverage of around 1.0x for AIS and 2.0x for PTT.
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: AIS has THB15.5 billion in debt maturing in 2023. Fitch believes liquidity is manageable, supported by its cash balance of THB10 billion and ability to access domestic debt capital in light of its strong credit profile. In addition, we expect AIS will generate positive cash flow of around THB3 billion in 2023.
AIS, Thailand's largest mobile-phone operator, has a 48% service revenue market share and also offers fixed-broadband services nationwide with 2.2 million subscribers, accounting for around 16% of the subscriber market. Intouch Holdings Public Company Limited and Singapore Telecommunications Limited (A/Positive) are major shareholders with 40% and 23% stakes, respectively.
DATE OF RELEVANT COMMITTEE
06 October 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings of AIS and its subsidiary, AWN, are equalised, reflecting our view that AIS has 'High' strategic and operational incentives to support AWN.
Additional information is available on www.fitchratings.com