Equity Pricing Strategies

Keith Neruda, CFA

Independent Insight Provider

Equity Bottom-Up

Since we last wrote about the Thai telcos on April 5th (<a href="https://www.smartkarma.com/insights/what-s-the-market-pricing-in-thai-telcos-advanced-info-and-dtac" target="_blank" data-smartkarma-citation="insights:3280">What’s the Market Pricing In: Thai Telcos, Advanced Info and DTAC</a> ), <a href="https://www.smartkarma.com/entities/947" target="_blank" data-smartkarma-citation="entities:947">Advanced Info Service Pcl</a>'s (ADVANC TB, Bt152.5) share price has fallen Bt22.5 or 12.9%. Ostensibly, the trigger was ADVANC stepping up to say that it was willing to pay the hefty Bt75.65bn price tag to buy the second 900MHz license that <a href="https://www.smartkarma.com/entities/949" target="_blank" data-smartkarma-citation="entities:949">Jasmine Intl Public Co Ltd</a> (JAS TB) had defaulted on. Previously, ADVANC and <a href="https://www.smartkarma.com/entities/948" target="_blank" data-smartkarma-citation="entities:948">Total Access Communication</a> (DTAC TB) had lobbied for a much lower starting bid for the reauction of that spectrum.While lower prices are certainly better, it is worth figuring out how much that spectrum is actually worth to ADVANC, assuming that they do end up with it at that cost. At the moment, it seems that the market is crediting that spectrum as having virtually no value since a straight-up reduction to ADVANC's enterprise value of the cost of the spectrum would equate to Bt25.4/sh, less than 2% more than the shares have already fallen.Such a write down, however, seems unreasonable since we know that the extra spectrum will at the very least lower capex costs in the long-run. Moreover, it could offset some of the expected declines in ADVANC’s EBITDA margins, which would have gone to “renting” spectrum from the Telephone Organization of Thailand (TOT). It would also likely reduce some of the expected loss of revenue market share to <a href="https://www.smartkarma.com/entities/8" target="_blank" data-smartkarma-citation="entities:8">True Corp Pcl</a> (TRUE TB).Ignoring any positive impact to revenue, we estimate that ADVANC would need to improve its normalised free cash flow (N-FCF) margin by 2.7% to offset the additional cost of spectrum, assuming a fair value N-FCF yield of 6.0%. ADVANC could achieve this through a combined reduction in capex to sales and increase in EBITDA margin. Improvements of at least that amount seem reasonable to us considering on EBITDA margin alone, consensus forecasts for 2018 were brought down by over 6% after ADVANC failed to secure the 900MHz spectrum in December. We'd be buying ADVANC here at an attractive N-FCF yield of 7.3% based on changes to our model described below. At a 6% target yield, ADVANC would be worth Bt198.1, upside of 30%.

Since we last wrote about the Thai telcos on April 5th (What’s the Market Pricing In: Thai Telcos, Advanced Info and DTAC ), Advanced Info Service Pcl's (ADVANC TB, Bt152.5) share price has fallen Bt22.5 or 12.9%. Ostensibly, the trigger was ADVANC stepping up to say that it was willing to pay the hefty Bt75.65bn price tag to buy the second 900MHz license that Jasmine Intl Public Co Ltd (JAS TB) had defaulted on. Previously, ADVANC and Total Access Communication (DTAC TB) had lobbied for a much lower starting bid for the reauction of that spectrum.While lower prices are certainly better, it is worth figuring out how much that spectrum is actually worth to ADVANC, assuming that they do end up with it at that cost. At the moment, it seems that the market is crediting that spectrum as having virtually no value since a straight-up reduction to ADVANC's enterprise value of the cost of the spectrum would equate to Bt25.4/sh, less than 2% more than the shares have already fallen.Such a write down, however, seems unreasonable since we know that the extra spectrum will at the very least lower capex costs in the long-run. Moreover, it could offset some of the expected declines in ADVANC’s EBITDA margins, which would have gone to “renting” spectrum from the Telephone Organization of Thailand (TOT). It would also likely reduce some of the expected loss of revenue market share to True Corp Pcl (TRUE TB).Ignoring any positive impact to revenue, we estimate that ADVANC would need to improve its normalised free cash flow (N-FCF) margin by 2.7% to offset the additional cost of spectrum, assuming a fair value N-FCF yield of 6.0%. ADVANC could achieve this through a combined reduction in capex to sales and increase in EBITDA margin. Improvements of at least that amount seem reasonable to us considering on EBITDA margin alone, consensus forecasts for 2018 were brought down by over 6% after ADVANC failed to secure the 900MHz spectrum in December. We'd be buying ADVANC here at an attractive N-FCF yield of 7.3% based on changes to our model described below. At a 6% target yield, ADVANC would be worth Bt198.1, upside of 30%.

Market Pricing in that Advanced Info Gets No Benefit from New Spectrum