Initiating Coverage Thailand 7 November 2019 Communications | Telecommunications True Corp (TRUE TB) Sell Target Price (Return) THB4.45 (-13%) Cash-Driven Growth Winding Down; Initiate SELL Price: THB(+18)5.10 Market Cap: USD 5,653m Avg Daily Turnover (THB/USD) 946m/31.5m Initiate coverage with SELL, DCF-based THB4.45 TP, 13% downside and Analysts 1.5% FY20F yield. Despite having the strongest market share growth among integrated telcos in the past few years, TRUE’s core earnings are still sluggish, pressured by massive operating costs and capex during its expansion. While Kasamapon Hamnilrat its balance sheet is starting to tighten, with lower funding room from asset +66 2088 9739 divestments, we believe its key priority in the short term is to balance [email protected] maintaining market share growth, while returning to positive operating FCF. Challenging outlook. Despite improving monetisation from the mobile industry, we believe TRUE’s strategic refocus on improving profitability and Pakorn Khaoeian turning cash flow positive may not be easy, given its high operating cost structure, and a vendor finance cycle that may need more time to scale down. With the industry switching to cheaper subs acquisition methods with less aggressive marketing campaigns, we are concerned on the trade-off, as the Share Performance (%) growth momentum may decelerate. While the fixed broadband (FBB) subs base continues to grow despite intense competition, we think the company will YTD 1m 3m 6m 12m slowly cede its high market share in this segment to newcomers. Absolute (1.9) (1.9) (19.0) 1.0 (14.3) Strategy. Since 2017, it has divested over THB68bn of network assets to Relative (5.8) (3.0) (16.2) 4.3 (11.6) Digital Infrastructure Fund (DIF) to support capital flow. However, the recent 52-wk Price low/high (THB) 4.50 – 6.80 disposal to DIF has left it with limited network assets on hand for further divestment. While the focus on cost control should prevent competition from reaching previous irrational levels, we expect the company to focus on fixed mobile convergence (FMC) as its key strategy to support pre-to-post migration, lift ARPU and grow its FBB subs base. We conservatively expect FCF to turn positive only after cash capex declines in 2021. Cost control the real earnings driver in FY19. Despite positive ARPU recovery prospects in the mobile unit, FBB and pay-TV revenues are expected to continue being pressured by intense competition. While we expect group core service revenue to be flat (0.6% YoY), core earnings are expected to grow by 163% from a low base to THB 4.8bn, mostly supported by significantly lower device subsidies and stringent cost control. Although we anticipate extra gains from selling assets to DIF (amounting c.THB 4.5bn), we do not expect special dividends to be paid out from this transaction. Source: Bloomberg; Note: Data as at 06 Nov 2019 Incoming headwinds. In addition to stiff competition from newcomers in FBB continuing into 2020, we think TRUE’s mobile business will be challenged by a Table of Contents Financial Exhibits 2 deceleration in pre-paid to post-paid migration, and growing ARPU through Investment Thesis 3 higher price plan replacements amidst the economic slowdown. We also see Valuation 3 more downside in its pay-TV business, even though it acquired English Premier Investment Merits 5 Brief Overview 14 League (EPL) broadcast rights (2019-2021), given the popularity of over-the- 3Q19 Results Preview 21 top (OTT) streaming services that charge much lower fees. Initiate with SELL. Our DCF-derived TP of THB4.45 (WACC 8.97%, TG 1%) implies EV/EBITDA of 8.6x, or -0.25SD from its 5-yr average. Upside risks are an ongoing litigation settlement and better-than-expected industry competition. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (THBbn) 141.29 162.77 141.58 140.29 142.17 Reported net profit (THBbn) 0.5 7.0 9.3 5.0 5.3 Recurring net profit (THBbn) (4.5) 1.8 4.8 5.0 5.3 Recurring net profit growth (%) n.a n.a 163.3 5.1 4.6 Recurring EPS (THB) (0.1) 0.1 0.1 0.2 0.2 DPS (THB) 0.0 0.1 0.1 0.1 0.1 Recurring P/E (x) (37.4) 93.2 35.4 33.7 32.2 P/B (x) 1.3 1.3 1.2 1.2 1.2 P/CF (x) 34.1 4.5 5.8 3.3 3.6 Dividend Yield (%) 0.6 1.7 2.7 1.5 1.5 EV/EBITDA (x) 7.0 5.4 8.3 8.6 8.4 Return on average equity (%) (3.6) 1.4 3.4 3.6 3.7 Net debt to equity (%) 0.9 1.0 1.1 1.3 1.3 Source: Company data, RHB; Note: Data as at 6 Nov 2019 See important disclosures at the end of this report 1 True Corp Thailand Initiating Coverage 7 November 2019 Communications | Telecommunications Financial Exhibits Financial model updated on: 2019-11-06. Asia Thailand Financial summary Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Telecommunications Recurring EPS (THB) -0.1 0.1 0.1 0.2 0.2 True Corporation EPS (THB) 0.0 0.2 0.3 0.2 0.2 DPS (THB) 0.0 0.1 0.1 0.1 0.1 Major shareholders (%) BVPS (THB) 3.8 4.0 4.2 4.2 4.3 Charoen Pokphand Group 50.6 China Mobile international 18.0 UBS 9.0 Valuation metrics Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Recurring P/E (x) -37.4 93.2 35.4 33.7 32.2 Valuation basis P/E (x) 312.3 24.5 18.3 33.7 32.2 DCF P/B (x) 1.3 1.3 1.2 1.2 1.2 FCF yield (%) (17.1) (8.5) (7.1) (3.7) 4.9 Key drivers Dividend yield (%) 0.6 1.7 2.7 1.5 1.5 i. Monetisation improvement from mobile business; EV/EBITDA (x) 7.0 5.4 8.3 8.6 8.4 ii. Strong convergence services bolster market share acquisition with cheaper cost. Income statement (THBm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Operating revenue 141,289 162,773 141,582 140,293 142,172 Key risks EBITDA 39,912 56,001 43,898 40,525 41,922 i. Cash-driven growth starting to be capped; Depreciation and amortisation (33,473) (33,592) (26,504) (27,703) (28,735) ii. Tightening balance sheet with limited sources of EBIT 6,440 22,409 17,394 12,822 13,187 funding from asset divestment; Interest expenses (7,896) (7,226) (9,343) (9,933) (10,058) iii. High operating cost structure needs more time to Profit before tax 1,855 13,045 11,347 6,156 6,439 scale down; iv. Intense competition from FBB business. Taxation (1,316) (6,010) (2,043) (1,108) (1,159) Recurring net profit (4,547) 1,825 4,805 5,048 5,280 Company Profile True Corp is a fully-integrated telco provider offering Cash flow (THBm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F mobile, broadband internet and television content, as Cash flow from operations 2,050 6,958 9,305 5,048 5,280 well as other digital and telco services. The group’s key competitive strengths are quality-driven convergence Change in working capital (6,335) 18,487 13,507 15,548 16,161 propositions, a broad selection of communication CAPEX (34,083) (52,362) (41,500) (57,614) (39,164) services utilising advanced technologies, innovative Cash flow from investing activities (42,050) (61,169) (41,500) (57,614) (39,164) solutions, and a comprehensive range of digital media and content. Dividend paid 0 (1,034) (2,326) (3,588) (2,582) Cash flow from financing activities 5,114 25,662 14,394 (5,752) (13,826) Cash at beginning of period 50,184 18,226 20,672 23,040 10,912 Net change in cash (31,942) 2,421 2,368 (12,128) (5,469) Ending balance cash 18,226 20,672 23,040 10,912 5,444 Balance sheet (THBm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Cash and cash equivalents 18,226 20,672 23,040 10,912 5,444 Trade account receivable 47,703 64,476 66,544 64,535 63,978 Tangible fixed assets 176,190 205,812 232,350 252,072 268,299 Intangible assets 140,780 132,482 120,940 131,129 125,331 Total other assets 76,283 72,127 68,772 68,293 68,436 Total assets 459,182 495,569 511,646 526,941 531,488 Trade account payable 115,494 111,754 102,569 105,754 107,268 Short-term debt 77,529 87,269 94,875 97,652 99,534 Total long-term debt 49,924 68,054 86,512 91,504 88,437 Other liabilities 88,051 94,608 86,828 89,709 91,230 Total liabilities 330,998 361,685 370,784 384,619 386,468 Total equity 128,184 133,883 140,862 142,322 145,020 Net debt (109,227) (134,651) (158,347) (178,244) (182,527) Total liabilities & equity 459,182 495,569 511,646 526,941 531,488 Key metrics Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Revenue growth (%) 13.3 15.2 -13.0 -0.9 1.3 Recurring EPS growth (%) -9.7 -140.1 163.3 5.1 4.6 EBITDA margin (%) 28.2 34.4 31.0 28.9 29.5 Net profit margin (%) 0.4 4.3 6.6 3.6 3.7 Dividend payout ratio (%) n.a 14.9 50.0 50.0 50.0 ROE (%) -3.6 1.4 3.4 3.6 3.7 ROA (%) -1.0 0.4 0.9 1.0 1.0 Source: Company data, RHB See important disclosures at the end of this report 2 True Corp Thailand Initiating Coverage 7 November 2019 Communications | Telecommunications Investment Thesis We initiate coverage with SELL and a DCF-derived TP of THB4.45, reflecting 11% downside.