Service revenues for Thai telecom operators are likely to decline modestly in 2020 due to a slowing economy amid the coronavirus pandemic, says Fitch Ratings. We expect the sector's free cash flow to turn negative in 2020, as higher capex and spectrum payments exceed cash flow from operations.
Fitch expects mobile service revenues for Thai telecom operators to decline by 2%-3% in 2020 (2019: 3.6% growth), which will outperform our GDP forecast of 5.1% contraction for Thailand. Fitch believes the telecom sector will be more resilient in a downturn relative to other sectors, given the essential nature of its services.
Mobile service revenue grew at a modest pace of 1.9% yoy in 1Q20, but declined 2.1% qoq (2019: 3.6% growth). International roaming revenue, which accounted for 2% of service revenue, fell sharply by 22% yoy, due to the plunge in inbound and outbound tourists since February 2020. Quarterly revenues were also affected by a slowdown in new subscriber acquisition and slow migration of existing subscribers to higher-margin post-paid mobile services from low-margin pre-paid ones, due to the temporary closure of telecom service shops in late March 2020 as part of the measures to curb the pandemic. Total mobile subscribers in 1Q20 shrank 2.4% qoq and 1% yoy (4Q19: 1.4% growth qoq).
Fitch expects service revenue in 2Q20 to decline further qoq should the economic slowdown deepen in April and May. The temporary closure of some non-essential businesses will continue to put pressure on enterprise spending, while a higher unemployment rate could weaken consumer sentiment. Growth in telecom revenue is likely to lag the increase in data consumption, as operators offer tariff discounts and re-introduce unlimited data plans to bolster data consumption.
Fitch expects the industry's free cash flow to turn negative in 2020, underscoring our negative outlook on the Thai telecom sector. Capex intensity (including spectrum payments) for Thai telcos is likely to remain high at around 40% of revenue in 2020, mainly due to an increase in spectrum payments. Nevertheless, Fitch believes that telcos will have some flexibility to manage their leverage profiles, including scaling back 5G investment or reducing dividends if demand is weaker than expected.
Fitch believes high capex and spectrum payments will raise leverage for Thailand's largest mobile operator Advanced Info Service Public Company Limited (AIS; BBB+/AA+(tha)/Stable) and the third-largest operator Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Negative) in 2020. AIS indicated that it will increase capex (excluding spectrum payment) to THB35 billion-40 billion in 2020 from THB23 billion in 2019, mainly to support its 5G network rollout. While DTAC has yet to provide its full-year capex guidance for 2020 citing the uncertainties about operating environment, we expect the company to maintain capex (excluding spectrum payment) at THB15 billion-18 billion in 2020 (2019: THB18 billion).
Fitch forecasts AIS's and DTAC's FFO net leverage to increase to around 1.3x and 1.9x, respectively in 2020 from 1.0x and 1.7x in 2019. Nevertheless, AIS's current low financial leverage of 0.8x at end-1Q20 should provide sufficient headroom for additional investments. DTAC may gain some leverage headroom following the publication of Fitch's updated Corporate Rating Criteria. Fitch now treats operating and finance leases for the majority of corporate sectors as operating costs instead of capitalising them as debt. The difference between DTAC's lease-adjusted and unadjusted FFO net leverage of about 1.2x is significantly larger than that of its telecom peers. Its lease-equivalent debt represented 47% of DTAC's total adjusted debt in 2019.