ADVANCED INFO SERVICE ADVANC Rec. : BUY

Tuesday, Nov 4, 2014
3Q14 Result Notes
ADVANCED INFO SERVICE
ADVANC
Rec. : BUY
Good profit projected in 4Q14 and 2015
3Q14 profit rebounded as projected due to lower cost. Further profit growth is foreseen
in the high season in 4Q14. Although FY2014 profit would stay flat from 2013, the
growth of 15% can be expected in 2015. We have changed to use 2015 fair value; the
upside is still attractive for investment.
3Q14 profit rebounds as projected
ADVANC announced 3Q14 net profit at B8.96bn or the growth of 5.7%qoq
(+7.4%yoy), recovering from the prior quarter as projected. Excluding an
extraordinary expense of B74m (net impairment of assets after FX gain),
normalized profit grew 2.9%qoq (+5.4%yoy) to B9.0bn, thanks to a 1.6%qoq
decrease in cost of service (IC excluded) since the increasing cost of network
and depreciation expense from accelerating investment on 3G network
coverage expansion to 97% nationwide were negated by a 14.9%qoq
decrease in regulatory cost (see page 2). Moreover, selling and administrative
expense declined 7.8%qoq mainly because advertising cost lowered from
2Q14, which was 2014 World Cup period. The decreasing cost helped
compensate for service revenue (IC excluded) that decreased 0.7%qoq
(+1.5%yoy) in 3Q14 as a result of a low season.
Good profit projected in 4Q14 and 2015
We project ADVANC’s profit to continue improving in 4Q14 due to seasonal
effect (boosting revenue). A decrease in regulatory cost from 25% to 5.25%
of total revenue after subscriber migration from 2G to 3G (by the end of the
year, the proportion of 3G subscribers is projected to increase to 90% of total
subscribers, from 88% in 3Q14) and increasing number of 3G-supported
smartphone users (resulting in less dependency on 2G network) would offset
an increase in marketing expense during the high season and rising cost of
network from capacity expansion in high usage intensity areas. 9M14 profit
accounts for 74% of FY2014 forecast; we maintain our forecast, projecting the
profit to stabilize yoy at B36bn in 2014 and grow 15% in 2015 owing to rising
revenue following the economic rebound, decreasing regulatory cost for a full
year, and a benefit from the company’s stopping recognizing amortization
expense for 2G equipment since September 15, 2015.
Fair value provides 20% upside
Source : ASP Research
FY12A
145,651
34,885
35,160
11.73
18.2
10.90
5.1%
14.65
14.5
9.5
FY13A
146,813
36,274
37,139
12.20
17.5
12.15
5.7%
15.44
13.8
10.1
Upside : 19.7%
Dividend Yield : 5.1%
Total Return : 24.8%
Market Cap. (Bm) : 710,569
CG Score:
Technical Chart
ASP vs IAA concensus
EPS (B)
We have switched to use 2015 fair value of B285 (DCF, 8.9% WACC, 2%
terminal growth), which implies as much as 19.7% upside. Dividend yield can
be expected at 5-6% p.a. on average. BUY is reiterated.
Key Data
FY: Dec 31
Sales (Bm)
Net Profit (Bm)
Norm. Profit (Bm)
EPS (B)
PER (x)
DPS (B)
Dividend Yield (%)
BVS (x)
PBV (X)
EV/EBITDA
Current Price (B): 238.00
Target Price (B): 285.00
FY14F
145,629
36,373
37,237
12.23
17.4
12.23
5.7%
16.42
13.0
10.0
FY15F
151,225
42,324
42,324
14.24
15.0
14.24
6.7%
17.52
12.2
8.9
FY16F
150,072
53,054
53,054
17.84
11.9
17.85
8.4%
19.51
10.9
8.2
ASP
Cons
%diff
2014F
12.23
12.39
-1%
2015F
14.24
14.21
0%
Source: IAA concensus and ASP
Kawee Manitsupawong
License No. : 003974
[email protected]
Suwat Wattanapornprom
License No. : 044015
[email protected]
This report is a rough translation of one of our Thai-language research products. It is produced primarily with time efficiency in mind, so that English-reading clients can see what the main recommendations are from our Thai-language research
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Regulatory cost lower than usual due to roaming agreement
The regulatory cost of ADVANC decreased at a greater rate than other
quarters in 3Q14. Regulatory cost to service revenue (IC excluded) ratio in
3Q14 stood at 15.6%, versus 18.2% in 2Q14 (or an average decrease of 0.51% per quarter in recent quarters) due to three following reasons:
1) Like the previous quarter, more subscribers of ADVANC will be migrated
from 2G network, which has regulatory cost of 25%, to 3G network, which
has regulatory cost of only 5.25% (3G subscribers in 3Q14 account for 88%
of ADVANC’s total subscribers, up from around 80% in 2Q14).
2) The proportion of ADVANC’s 3G subscribers who use smartphone (capable
for 3G) rose from 46% in 2Q14 to 49% in 3Q14, reducing the company’s
dependency on 2G network (which has higher regulatory cost).
3) 51% of the subscribers migrated from 2G to 3G network still use oldfeature mobile phones that cannot support 3G service, which means they still
have to depend on 2G network (old concession) for data roaming. The
roaming rate from 2G to 3G is B0.6 per minute with a sliding scale discount
when the usage reaches the agreed limit. In this regard, ADVANC has to pay
regulatory cost to TOT, a 2G concession owner, at a rate of around 30% of
the roaming revenue. Since the roaming usage in 3Q14 exceeded the limit,
regulatory cost for the roaming revenue in 3Q14 would decline significantly.
Quarterly Earnings Result
(Bm)
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
% qoq
% yoy
9M14
9M13
% yoy
Sales & Services (incl. IC)
38,526
37,027
34,460
36,802
36,449
36,480
35,354
-3.1%
2.6%
108,283
110,013
-1.6%
Service (excl. IC)
29,500
29,103
28,947
29,010
28,967
29,603
29,381
-0.7%
1.5%
87,951
87,550
0.5%
Cost of Sale & Service (incl. IC)
(23,185)
(21,946)
(19,513)
(20,528)
(20,463)
(20,392)
(19,278)
-5.5%
-1.2%
(60,133)
(64,644)
-7.0%
Cost Service (excl. IC)
(14,755)
(14,509)
(14,336)
(13,210)
(13,266)
(13,603)
(13,385)
-1.6%
-6.6%
(40,254)
(43,600)
-7.7%
Gross Profit
15,341
15,081
14,947
16,274
15,986
16,088
16,076
-0.1%
7.6%
48,150
45,369
6.1%
Selling & admin. Expenses
(2,906)
(3,350)
(3,873)
(4,117)
(3,768)
(4,823)
(4,449)
-7.8%
14.9%
(13,040)
(10,129)
28.7%
EBITDA
16,614
15,825
15,396
15,944
16,430
15,687
16,623
6.0%
8.0%
48,740
47,836
1.9%
Net Profit
9,922
9,195
8,342
8,816
9,481
8,474
8,955
5.7%
7.4%
26,911
27,459
-2.0%
Norm Profit
9,867
9,349
8,570
9,354
9,646
8,773
9,029
2.9%
5.4%
18,419
19,217
-4.2%
Norm EPS
3.32
3.14
2.88
3.15
3.24
2.95
3.04
2.9%
5.4%
6.20
6.46
-4.2%
Gross Profit Margin
39.8%
40.7%
43.4%
44.2%
43.9%
44.1%
45.5%
44.5%
41.2%
Norm Profit Margin
25.6%
25.2%
24.9%
25.4%
26.5%
24.0%
25.5%
17.0%
17.5%
Source : Financial Statement/ ASP Research
Non-Voice revenue
Source : ADVANC
Voice revenue
Source : ADVANC
Cost of Revenue
Source : ADVANC
Debt repayment schedule
Source : ADVANC
2014-2016F Earning Forecast
Income Statement (Bm)
Year ended 31 Dec
Sales and serivce revenue
Cost of sales & services
Cash Flow Statement (Bm)
2013
2014F
2015F
2016F
146,813
145,629
151,225
150,072
47,240
47,078
54,584
68,653
Year ended 31 Dec
Net profit
36,230
Gross profit
194,053
192,707
205,809
218,725
Non cash items
Selling and admin. Expenses
(14,245)
(17,359)
(17,977)
(18,629)
Depreciation & amortization
Operating profit
179,808
175,348
187,832
200,097
Unrealized gain/loss on FX
-
-
-
-
Profit sharing from equity method
2013
2014F
2015F
787
16,541
Others
36,373
(39)
19,133
42,324
(37)
2
3
4
5
222
47
(0)
64,568
(315)
(410)
(784)
Changes in net working captial
(4,022)
5,150
515
(1,002)
(1,390)
(1,386)
(1,632)
Net cash flow from operation
51,329
60,350
61,348
Net income before taxes
243,374
173,643
186,036
197,681
Cash flow from investment
Income taxes
(10,008)
(9,458)
(11,012)
(14,075)
Inc./Dec. in short-term investment
Net income before minorities interest
233,366
164,186
175,024
183,607
Inc./Dec. in fixed assets
44
144
141
110
36,274
36,373
42,324
53,054
(28,460)
Others
0
Net cash flow from investment
Norm profit
37,139
37,237
42,324
53,054
Cash flow from financing activities
EPS
12.49
12.52
14.23
17.84
Inc./Dec. in loans
Norm EPS
12.49
12.52
14.23
17.84
Inc./Dec in other liabilities
Inc./Dec in capital & share premium
(35)
11,913
73
Other incomes/expenses
Minorities interest
53,054
19,193
Interest expenses
Net profit
2016F
Cash flow from operation
(219)
64,413
(38)
(38)
(39)
(40,000)
(20,000)
(20,000)
(3,656)
0
0
(28,460)
(43,694)
(20,038)
(20,039)
(4,486)
(1,490)
(3,341)
(3,341)
7,783
15,645
-
4,000
-
-
-
-
Adjustment in shareholder equities
Sales growth (YoY%)
1%
-1%
4%
-1%
Dividend payments
(33,889)
(33,463)
(39,051)
(47,153)
Gross profit growth (YoY%)
-1%
-1%
7%
6%
Net cash flow from finacing activities
(31,572)
(19,307)
(42,392)
(46,494)
Operting profit growth (YoY%)
-3%
-2%
7%
7%
Inc./Dec. in net cash
(8,703)
(2,651)
(1,083)
(2,119)
4%
0%
16%
25%
Cash on hand
11,473
8,833
7,759
5,648
4Q13
1Q14
2Q14
3Q14
2016F
Net profit growth (YoY%)
Quarterly Income Statement
(Bm)
Balance Sheet (Bm)
2014F
2015F
Sales and serivce revenue
36,802
36,449
36,480
35,354
Cash and cash equivalent
11,473
8,833
7,759
5,648
Cost of sales & services
20,528
20,463
20,392
19,278
Receivables
15,116
6,621
6,184
6,166
Gross profit
16,274
15,986
16,088
16,076
2,865
1,893
1,966
1,951
4,117
3,768
4,823
4,449
153
156
159
163
35,922
69,585
81,248
90,911
Selling and admin. Expenses
Interest expenses
Profit sharing from equity method
(241)
(228)
(229)
(369)
-
-
-
-
Net income before taxes
11,506
11,915
10,696
11,259
Income taxes
(2,438)
(2,708)
(2,443)
(2,226)
Net income before minority interest
Minority interests
Net income
Extraordinary items
Norm profit
110
110
110
(228)
(538)
(165)
(299)
(538)
9,354
9,481
(165)
9,646
8,474
(299)
8,773
Inventory
Other current assets
Fixed assets
Assets under concessions
141
8,816
Year ended 31 Dec
8,955
(74)
20,500
9,280
-
-
Total assets
112,026
120,727
120,686
127,227
Payables
11,718
11,624
12,070
11,978
2,817
2,845
2,873
2,902
Long-term loans
15,355
31,000
31,000
35,000
Total liabilites
66,133
71,903
68,781
69,212
Portion of long-term loans within 1 yr
9,029
Paid-up capital
Sales growth (YoY%)
-6%
Gross profit growth (YoY%)
-5%
2013
-1%
3%
2,973
2,973
2,973
2,973
Premium on common stock
22,372
22,372
22,372
22,372
32,314
10%
4%
7%
8%
Retained earnings.
20,229
23,140
26,413
Operting profit growth (YoY%)
5%
-2%
-4%
5%
Total shareholders' equities
45,893
48,810
52,091
58,000
Net profit growth (YoY%)
4%
-4%
-6%
5%
Total liabilities & equities
112,026
120,727
120,886
127,227
2013
2014F
2015F
2016F
Financial Ratio
Year ended 31 Dec
Key Assumption
Year ended 31 Dec
2013
2014F
2015F
2016F
Current ratio (x)
0.8
0.6
0.6
0.6
Subscribers - postpaid (Bm)
4.0
4.8
5.4
5.8
Receivable turnover (x)
9.7
22.0
24.5
24.3
- prepaid (Bm)
34.3
36.7
39.8
40.1
Payable turnover (x)
(4.0)
(4.1)
(4.5)
(5.7)
Debts to equitiy (x)
1.4
1.5
1.3
1.2
Postpaid 3G
758
710
650
645
ROAA
0.3
0.3
0.4
0.4
Prepaid 3G
217
199
176
157
Blended ARPU
249
227
223
215
ROAE
Source: Financial Statement / ASP Research
79.0%
74.5%
81.3%
91.5%
ARPU