Fitch: No Immediate Rating Impact from AIS's Weak Guidance
OREANDA-NEWS. Advanced Info Service Public Company Limited's (AIS) weak EBITDA margin guidance for 2016 is unlikely to have an immediate impact on the company's ratings, according to Fitch Ratings. We believe that AIS should have a sufficient cushion to support a temporary earnings drop and an increase in financial leverage. AIS's 'BBB+'/'AA+(tha)'/Stable ratings reflect its large scale, leading market position, and relatively low financial leverage even during periods of intense competition and high capex.
Fitch, however, expects operating EBITDAR to decline by 17% to around THB60bn in 2016 from THB72.4bn in 2015. The decline would be mainly a result of the potential one-off expenses relating to the shutdown of its 2G, 900MHz network, after the company failed to secure the 900MHz spectrum in December 2015's auction. AIS will need to offer handset subsidies to its 2G customers to encourage them to move to a 3G network before the 2G network is shutdown, which is likely before the end of March 2016.
AIS also plans to continue provide services for the remaining 2G customers during the transition period via a roaming service with another operator. The company estimates the total cost for handset subsidy and roaming service to be around THB8bn in 2016.
As a result, Fitch estimates that AIS's funds flow from operation (FFO)-adjusted net leverage will slightly exceed our 1.5x guideline for its 'BBB+' rating level in 2016. However, we expect this to come down to below 1.5x in 2017 due to cash flow improvements after the one-off handset subsidies and roaming costs fall away. Yet we may nevertheless take negative rating action if leverage remains above 1.5x for a protracted period, due either to the lack of anticipated earnings recovery or higher debt. At end-2015, AIS's FFO-adjusted net leverage remained low at 1.0x.
Fitch believes that AIS should have enough spectrum to provide 3G and 4G services for its large subscriber base despite the lack of low-frequency 900MHz spectrum and the 2G network shutdown. In November 2015, AIS won the bidding for 1.8GHz spectrum, allowing the company to launch its 4G service in January 2016. The potential partnership with TOT Public Company Limited (TOT, the state-owned telecom company) would also allow AIS to utilise TOT's 2.1GHz spectrum and towers to enhance its 3G service. Fitch expects that AIS will continue to maintain its leading market position, with service revenue market share of around 50% over the next two years (9M15: 52.4%).