PTT: The operating license

PTT: The operating license for GSP#6 to be granted soon! - Buy (Target Bt340.00)

? According to a local newspaper, Kaohoon, PTT’s top management Mr. Permsak Cheevawattananon claimed that PTT’s GSP#6 is likely to obtain an operating license within this Sep 2010.

? PTT expects it to take 30 days for commissioning and test running this new GSP with a 50% utilization rate. Afterward, the plant is likely to run at full capacity within the next two months to serve the current strong domestic demand for natural gas and LPG consumption.

? Management does not expect any negative effects to the start-up and/or operation of this new GSP from the protests in Map Ta Phut at the end of this month.

? This news could act as a positive share price catalyst to PTT in the short term as we previously expected the granting of the operating license to GSP#6 and other projects in Map Ta Phut to be delayed for a few weeks or months due to political intervention.

? As we assume GSP#6 to start contributing earnings in 2011, the quicker-than-expected operation start-up of the plant offers upside to our earnings forecast in 2010 of Bt72.2bn. Additionally, as the current demand for natural gas consumption has reached 4,000mmcfd—representing about 6% growth—this stronger-than-expected demand (~4% growth was the previous projection) could imply a higher profit contribution from the gas business in 2011. Therefore, our 2011 earnings forecast of Bt79.8bn is also subject to upside risk.

? Given all this, we reiterate our BUY rating to PTT with a mid-2011 target price of Bt340 due to potential upside to our earnings forecast and its cheap valuation—it trades at 10.9x of an average 2010-11 PER compared to 10.5x of its regional peers. The premium is deserved due to its stronger earnings growth and ROE.

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%

Thailand Telecom: An injunction on the 3G auction – Neutral

Event: Yesterday, the Central Administrative Court issued an injunction on the upcoming 3G auction regarding the lawsuit filed by CAT Telecom. The Court ruled that an interpretation on the bidding needs to wait until the new regulator is set up as part of the new Frequency Allocation Act (FAA). Today, the regulator plans to appeal the ruling to the Supreme Admin Court. The auction will be cancelled if there is no court order by Monday at 9.00 a.m.


Comment:

Timeframe of the Supreme Admin Court is the key

With the tight schedule (only three days left), the chance that the Supreme Court will rule before the auction is low, in our view. We thus expect the auction to be delayed from 20 Sep. The injunction ruling will negatively impact telco share prices, particularly DTAC and TRUE, which have rallied by 23% and 117% since July on optimism over 3G licensing.

… Auction likely delayed despite a favorable ruling after Sep

If the ruling comes out after Sep, even one in favor of the NTC, the expiring terms of three commissioners at the end of Sep will weaken the legal authority of the regulator in proceeding with the auction. With the upcoming approval of the Frequency Allocation Act (FAA), which will be discussed below, the auction is unlikely to be resumed.

… only hope for 3G auction happening is a favorable ruling within next week

If a favorable ruling comes out within next week, then the regulator can legally proceed with the auction. However, risk persists as there is still uncertainty over the verdict in the CAT lawsuit. The winning bidders may delay their investment, and this should cause downside to the expected benefit from 3G licenses.

3G by end of 2011 at the earliest

The FAA is now being subjected to final scrutiny by a joint committee before submission for parliamentary approval, which is expected by Nov. The establishment of the new regulator, the National Broadcasting and Telecom Commission (NBTC), should take at least six months, and an overhaul of the 3G licensing terms will take another six months.

Upside to 2010F DPS

Without CAPEX on 3G, we raise our 2010F DPS by approximately 50% for both telcos under our coverage. We now expect Bt9.3/sh for ADVANC and Bt2.9/sh for DTAC.

Recommendation:

- We downgrade our recommendation to ‘underweight’ (from under review) for the sector. Disappointment over 3G will overshadow recovery in the 2G business in the near term.

- Stripping out 3G value from our TPs, our new TPs are reduced to Bt96/sh (from Bt110/sh) for ADVANC and Bt50/sh (from Bt60/sh) for DTAC. The current prices offer limited upside to our new TPs. We therefore reduce our recommendation to HOLD (from under review) for both ADVANC and DTAC.

- A deep dip in share prices should provide an opportunity to BUY for their attractive dividend yields. We prefer ADVANC dividend yield-wise.