Equity Pricing Strategies

Keith Neruda, CFA

Independent Insight Provider

Equity Bottom-Up

Total Access Communication / Equity Bottom-Up

The Thai telecom operators, Advanced Info Service (ADVANC TB, Bt175.0) and Total Access Communication (DTAC TB, Bt38.0) trade 31% and 61% below their 2015 highs but have also rebounded 34% and 35% from their Jan 2016 lows. This report seeks to answer whether or not there is still more upside using the Normalized Free Cash Flow (N-FCF) framework laid out in <a href="https://www.smartkarma.com/insights/what-s-the-market-pricing-in-apple-vs-amazon-c41d9172-9535-4231-8cb3-e5bda58a851d" target="_blank">What’s the Market Pricing In: Apple Vs. Amazon</a>.Our answer is that analyst assumptions appear overly pessimistic in terms of revenue and capital expenditures, considering that the threat of a 4th operator disrupting the market has all but disappeared. Higher revenues and lower long-term capex spending could lead both share prices higher in the medium-term, especially the more operationally leveraged DTAC.Using a long-term capex to sales ratio of 15%, still higher than historical averages, and 5% higher revenue forecasts would yield a fair value of Bt183.7 (+4.9%) for ADVANC at an N-FCF yield of 6.0% and Bt63.0 (+65.8%) for DTAC at an N-FCF yield of 6.5%. A 12% capex to sales ratio would bring the fair values up to Bt206.3 (+17.9%) and Bt77.6 (+104.2%).

The Thai telecom operators, Advanced Info Service (ADVANC TB, Bt175.0) and Total Access Communication (DTAC TB, Bt38.0) trade 31% and 61% below their 2015 highs but have also rebounded 34% and 35% from their Jan 2016 lows. This report seeks to answer whether or not there is still more upside using the Normalized Free Cash Flow (N-FCF) framework laid out in What’s the Market Pricing In: Apple Vs. Amazon.Our answer is that analyst assumptions appear overly pessimistic in terms of revenue and capital expenditures, considering that the threat of a 4th operator disrupting the market has all but disappeared. Higher revenues and lower long-term capex spending could lead both share prices higher in the medium-term, especially the more operationally leveraged DTAC.Using a long-term capex to sales ratio of 15%, still higher than historical averages, and 5% higher revenue forecasts would yield a fair value of Bt183.7 (+4.9%) for ADVANC at an N-FCF yield of 6.0% and Bt63.0 (+65.8%) for DTAC at an N-FCF yield of 6.5%. A 12% capex to sales ratio would bring the fair values up to Bt206.3 (+17.9%) and Bt77.6 (+104.2%).

What's the Market Pricing In: Thai Telcos, Advanced Info and DTAC