Fitch Maintains Rating Watch Negative on DTAC's 'A+(tha)' Rating

Fitch placed DTAC on Rating Watch Negative on 28 February 2022 after the company's board approved a merger agreement with CP Group-owned True Corporation Public Company Limited (TRUE). Fitch will resolve the Rating Watch upon completion of the transaction, which is likely to be in 1Q23. DTAC received acknowledgement from the regulator for the merger on 25 October 2022 and the company is now assessing the regulator's conditions for the merged entity.

The Rating Watch Negative reflects our view that the credit profile of the post-merger entity, NewCo, is likely to be weaker than that of pre-merger DTAC. We believe NewCo's better market position and greater service diversification may not compensate for a weaker financial profile due to high leverage. The final rating of NewCo will depend on our assessment of the transaction and post-merger financial policies. Any downgrade is likely to be limited to one notch.

KEY RATING DRIVERS
Merger Strengthens Competitive Position: The deal should drive long-term synergies to allow DTAC and TRUE to compete on data pricing and network capacity. It will also strengthen the merged entity's position as Thailand's largest mobile operator, raising its mobile revenue market share to over 50%, from TRUE's 31% and DTAC's 22% in 2021. The enlarged spectrum holdings also will enable NewCo to better compete against incumbent telco, Advanced Info Service Public Company Limited (AIS, AA+(tha)/Stable).

Pro Forma Leverage to Weaken: The better market position of NewCo could be offset by its higher leverage. We expect pro forma EBITDA net leverage of the combined entity to be around 4x post-merger. DTAC's EBITDA (pre-TFRS16) for 2021 totalled THB22.4 billion, with EBITDA net leverage of 2.5x at the end of the period. Meanwhile, TRUE posted EBITDA (pre-TFRS16) of THB42.8 billion and EBITDA net leverage of 4.7x.

Consolidation Eases Long-Term Rivalry: We believe industry consolidation will support long-term price stability and profitability. Competition in mobile tariffs remained intense in 2022, with the challenging business environment stemming from Covid-19 pandemic driving tactical pricing strategies to preserve market share. The merger should also result in capex and opex savings, depending on how well and how quickly the two companies integrate their operations and networks.

DERIVATION SUMMARY
DTAC's 'A+(tha)' National Long-Term Rating is based on its Standalone Credit Profile (SCP), which reflects its smaller scale and higher net leverage than AIS. However, the DTAC-TRUE merger, if it materialises, would strengthen the telco's market position as the largest mobile operator in Thailand. However, NewCo's pro forma EBITDA net leverage would still be much higher than that of AIS, although NewCo's future leverage will hinge on its post-merger financial policies.

Fitch regards DTAC's credit profile as comparable with that of The Siam Cement Public Company Limited (SCC, A+(tha)/Negative). SCC's business profile is stronger than that of DTAC, supported by SCC's leading market position as the larger domestic cement producer in Thailand. SCC also has larger cash flow and greater geographic and business diversification in chemical and packaging businesses. This helps offset SCC's higher leverage; thus, both are rated at the same level.

KEY ASSUMPTIONS

• DTAC's revenue growth of around 2.5% in 2023, reflecting the slow recovery in the Thai economy;
• Merger to be completed in 1Q23, mirroring pro forma financials based on DTAC's and TRUE's 2021 results. We expect NewCo's revenue to grow by 2%-3% annually thereafter;
• Operating EBITDA margin (pre-TFRS 16) of 36% in 2022 and 2023 (9M22: 36.1%). We forecast operating EBITDA margin of 32%-33% for NewCo;
• Capex/revenue, excluding spectrum payments, of 19%-22% for the combined entity in 2023-2024;
• We expect NewCo to pay dividends of around THB8 billion a year in 2023-2024.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Fitch may restate the notching support if the merger with TRUE falls through and Telenor ASA commits to maintain medium-term majority ownership in DTAC, with the strategic support incentive remaining intact.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• We expect a one-notch downgrade of DTAC's National Ratings, depending on our assessment of NewCo's credit profile, which would balance our consideration of a strengthening in its competitive position in Thailand's telecom sector against its weaker post-merger financial profile. Fitch expects to resolve the Rating Watch once the deal becomes unconditional and NewCo's financial policies are known.

LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: Fitch believes DTAC will be able to manage its liquidity in 2023. Liquidity should be supported by its cash balance of THB5.9 billion, undrawn credit facilities of THB17.5 billion at end-September 2022, and its ability to access the debt capital market. DTAC has total debt of THB8 billion maturing over the next 12 months from end-September 2022.

ISSUER PROFILE
DTAC is the third-largest cellular phone operator in Thailand, with 22% service revenue market share in 2021. Telenor is the company's major shareholder.

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.

Additional information is available on www.fitchratings.com