Advanced Info Service: No FY2020 Revenue Guidance Given Uncertainty (OTCMKTS:AVIFY)

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Elevator Pitch

I downgrade my rating on Thailand’s largest mobile services company Advanced Info Service Public Company Limited (OTCPK:AVIFY) (OTCPK:AVIVF) [ADVANC:TB] from Neutral to Bearish.

This is an update of my prior article on Advanced Info Service published on February 10, 2020. Advanced Info Service’s share price has declined by -3.5% from Bt199.50 as of February 7, 2020, to Bt192.50 as of May 29, 2020, since my last update. Advanced Info Service trades at 8.4 times consensus forward next twelve months’ EV/EBITDA and offers a consensus forward FY2020 dividend yield of 3.6%.

Advanced Info Service’s 1Q2020 performance was lackluster, as its core mobile business suffered from intense competition for both the prepaid and postpaid segments and a substantial fall in revenue relating to tourists and international roaming. Also, Advanced Info Service has not provided official revenue guidance for FY2020, but a low-single digit YoY revenue decline is what the market is expecting for this year. But if economic conditions in Thailand turn to be worse than expected, Advanced Info Service could prove to be less defensive compared with its peers, given the company’s relatively higher revenue contribution from rural residents, low-income workers, and prepaid subscribers. Advanced Info Service’s capital expenditure budget for FY2020 seems high, and it is uncertain if 5G investments will eventually pay off in the form of higher ARPUs going forward.

Readers have the option of trading in Advanced Info Service shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers AVIFY and AVIVF, or on the Stock Exchange of Thailand with the ticker ADVANC:TB. For Advanced Info Service shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

For Advanced Info Service shares listed in Thailand, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Stock Exchange of Thailand is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $60 million, and market capitalization is above $17 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Advanced Info Service shares listed in Indonesia include The Vanguard Group, APG Asset Management and Dimensional Fund Advisors, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

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Lackluster 1Q2020 Performance

Advanced Info Service’s 1Q2020 revenue was flat YoY at Bt33,090 million, as a +27% YoY growth in segment revenue for the fixed broadband business was more than offset by a 1% YoY decline in segment revenue for its core mobile services business. The mobile services business accounted for approximately 92% of Advanced Info Service’s revenue in the most recent quarter, so I will be focusing on the company’s core mobile business for the purpose of this article.

The lackluster performance for Advanced Info Service’s core mobile services business was mainly the result of more intense competition and a substantial fall in revenue relating to tourists and international roaming due to the coronavirus pandemic.

Advanced Info Service lost 891,000 prepaid mobile subscribers in 1Q2020 with its prepaid mobile subscriber base down -2.7% QoQ. This was partially offset by a marginal +0.4% QoQ increase in its postpaid mobile subscriber base or a net addition of 33,000 postpaid subscribers in the last quarter. Advanced Info Service prepaid and postpaid mobile ARPU (Average Revenue Per User) were down -6.4% QoQ and -2.2 QoQ, respectively in 1Q2020.

At the company’s 1Q2020 earnings call on May 8, 2020, Advanced Info Service noted that the company has “a fairly large tourism segment” with its flagship data roaming product SIM2Fly. This was in response to a sell-side analyst’s question that the company “seems to have lagged a fair bit” in terms of QoQ prepaid mobile revenue growth as compared to its peers. Prepaid SIM cards for tourists and international roaming contributed approximately 2.0-2.3% of the company’s service revenue historically.

Furthermore, Advanced Info Service’s postpaid subscriber growth slowed in 1Q2020, as store closures due to the coronavirus pandemic led to a decrease in new postpaid subscribers acquired via physical distribution channels.

With respect to ARPU, unlimited data plans introduced for both the prepaid and postpaid segments as a result of increased competition have been a significant drag. While competition in the prepaid segment has traditionally been rather intense, it is noteworthy that competition has intensified even in the prepaid segment with the Thai mobile players all launching new cheap unlimited 10Mbps data plans priced at Bt300 per month since February 2020. Advanced Info Service acknowledged at its 1Q2020 earnings call on May 8, 2020, that “we might continue to see some pressure in terms of unlimited plans for a while” considering that “it will be a difficult situation to uplift the price” with the “fairly weak economic situation right now.”

No Official Revenue Guidance For FY2020

At the company’s 1Q2020 earnings call on May 8, 2020, Advanced Info Service disclosed that “I don’t think we’ll be giving normal guidance as usual because it’s too many uncertainties.”

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While Advanced Info Service has not provided official revenue guidance for FY2020, the company has stated at the recent earnings call that it expects its revenue growth to be slightly superior to Thailand’s GDP growth. With expectations of Thailand’s GDP growth for 2020 in the negative 5-6% range, a low single-digit YoY revenue decline for Advanced Info Service is likely. Market consensus expects Advanced Info Service’s revenue to decline -2.4% YoY from Bt180.9 billion in FY2019 to Bt176.5 billion in FY2020, as compared to a +6.5% YoY revenue growth for FY2019.

Notably, Advanced Info Service emphasized at the company’s 1Q2020 earnings call that “we have a very wide base, especially on the rural and lower end customer” and the “majority of our revenue (is) still coming from the prepaid segment”. In contrast, Advanced Info Service’s peers have a relatively higher proportion of mobile revenue derived from subscribers staying in urban areas and postpaid subscribers. This implies that Advanced Info Service is more vulnerable than its peers in the event of a severe economic recession for Thailand.

In other words, if economic conditions in Thailand turn out to be worse than expected this year, Advanced Info Service’s revenue and earnings could potentially drop to a larger extent compared with the company’s competitors and peers.

Capital Expenditures And 5G

Advanced Info Service’s capital expenditure budget for FY2020 is estimated at Bt35-40 billion relating to 4G capacity expansion and 5G network roll-out, which is double that of Bt20 billion in capital expenditures for FY2019. The larger-than-expected capital expenditures for FY2020 came as a negative surprise.

Specifically, Advanced Info Service targets for its 5G network to cover 13% of Thailand’s population by the end of this year. In contrast, the company’s target of 1.5 million 5G subscribers in 2021 seems very low compared to its 41-million strong mobile subscriber base.

More importantly, the positive ARPU uplift from 5G in the future might not be as significant as what the market expects. Advanced Info Service noted at the company’s 1Q2020 earnings call on May 8, 2020, that “on the 5G pricing, we are still debating what is the best pricing methodology to use for 5G, whether it is going to be similar to the 4G or priced at a premium.” There is also no certainty that cheap unlimited data plans will become a thing of the past with the onset of 5G. Advanced Info Service stressed at the recent earnings call that “we are always trying to find the opportunity to uplift price where we can” but noted “that depends a lot on the situation in the market.”

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Valuation

Advanced Info Service trades at 9.0 times trailing twelve months’ EV/EBITDA and 8.4 times consensus forward next twelve months’ EV/EBITDA based on its share price of Bt192.50 as of May 29, 2020. As a comparison, the stock’s historical five-year and 10-year average EV/EBITDA multiples were approximately 8.8 times and 8.7 times, respectively.

Advanced Info Service is also valued by the market at 17.5 times consensus forward next twelve months’ EV/EBIT and 19.6 times consensus forward next twelve months’ P/E.

Advanced Info Service offers a historical FY2019 dividend yield of 3.8%, and a consensus forward FY2020 dividend yield of 3.6%.

Peer Valuation Comparison For Advanced Info Service

Stock Consensus Forward Next Twelve Months’ EV/EBITDA Consensus Forward Next Twelve Months’ EV/EBIT Consensus Forward Next Twelve Months’ P/E Consensus Forward FY2020 Dividend Yield
True Corporation Public Company Limited (OTC:TCPFF) [TRUE:TB] 9.7 47.3 N.A. as company is expected to be loss-making 0.3%
Total Access Communication Public Company Limited (OTCPK:TACYY) (OTC:TACJF) (OTC:TCCMF) [DTAC:TB] 5.8 19.1 20.8 3.2%

Source: Author

Risk Factors

The key risk factors for Advanced Info Service include weaker-than-expected revenue growth due to the coronavirus pandemic and increased competition, lower-than-expected ARPU uplift from 5G in the future, and a cut in dividends going forward.

Note that readers who choose to trade in Advanced Info Service shares listed as ADRs on the OTCBB (rather than shares listed in Thailand) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.