DTAC: 3G disappointment is over

DTAC: 3G disappointment is over; focus on spectacular 3Q earnings - Trading Buy (Target Bt50)


3G disappointment is over; focus on 2G earnings recovery

We upgrade our recommendation to Trading BUY (from HOLD). The share price has slumped by 10% since the Central Administrative Court’s verdict on 16 Sep, proving a trading range to our 2G-only target price of Bt50/sh (21% upside at current price). We believe that the downside is limited at the current price. The key concern over a decline in 2011F earnings (as a result of rising revenue sharing and tax rate) is already reflected in the share price. DTAC now trades at low PER of 11x for 2010F and 11.5x for 2011F (based on normalized EPS), which is lower than the SET at 13x.

Spectacular 3Q earnings to drive the stock to re-rate in the short term

We expect DTAC’s 3Q normalized earnings to remain impressive with growth of 42.3% YoY on continued revenue recovery and a healthy EBITDA margin. On a QoQ basis, earnings will decline by 4.2% due to accelerating marketing expenses for on-net/off-net pricing parity promotions. Including extra gain of Bt507m, earnings growth will reach 74% YoY and 16.4% QoQ. We possibly upgrade our 2010F earnings growth to 37% (from currently 30%) to reflect stronger-than-expected earnings outlook in 2H after the results on 22 Oct.

Possible upside to 2010F DPS

With the indefinite delay in the 3G plan and overwhelming FCF, DTAC will now consider maximizing its capital structure, including refinancing existing debts to remove the dividend-payout covenant. Successful restructuring will imply a possible rise in the dividend payout to 100% (from the current expectation at 70%). 2010F DPS could rise to Bt3.9 or a yield of 9.5%