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I maintain a Neutral rating on Thailand-listed telecommunications company, True Corporation Public Company Limited (OTC:TCPFF) [TRUE:TB], the second-largest mobile operator in Thailand.

This is an update of my prior article on True Corporation, published on March 17, 2020. True Corporation’s share price has increased by +45% from Bt2.44 as of March 16, 2020, to Bt3.54 as of June 15, 2020, since my last update. True Corporation trades at 10.2 times consensus forward next 12 months’ EV/EBITDA, and it offers a consensus forward FY2020 dividend yield of 0.2%.

True Corporation’s 1Q2020 financial results were above expectations, as the mobile business’s stronger-than-expected performance was partially offset by weakness in its broadband and pay television business segments. True Corporation’s channel partnerships with its sister companies were the key factor in the mobile business’s strong performance in 1Q2020, and this is a structural competitive advantage that True Corporation has over its peers. But intense competition in the broadband segment and the suspension of live sports events for the pay television segments are key negatives. In addition, higher-than-expected 5G capital expenditures going forward are a key risk, which could lead to a further deterioration in True Corporation’s financial position.

Readers have the option of trading in True Corporation shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker TCPFF, or on the Stock Exchange of Thailand with the ticker TRUE:TB. For those shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

For those 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 $15 million, and market capitalization is above $3.8 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own True Corporation shares listed in Thailand include The Vanguard Group, Eaton Vance Management, TIAA Investments, 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.

Strong Performance From Mobile Business Due To Channel Partnerships With Sister Companies

True Corporation’s core service revenue increased +5% YoY and +1% QoQ to Bt25.8 billion in 1Q2020, while the company’s EBITDA (adjusted for financial impact of new Thai Financial Reporting Standards 16) grew +12% YoY and +5% QoQ to Bt12.2 billion over the same period.

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The mobile business was the bright spot for True Corporation in the most recent quarter. True Corporation’s mobile segment service revenue increased by +5.2% YoY and +1.2 QoQ in 1Q2020, while its competitors delivered negative mobile service revenue growth in the same quarter. Similar to its peers, True Corporation lost hundreds of thousands of prepaid mobile subscribers in 1Q2020, due to a decline in tourists and migrant workers as a result of the coronavirus pandemic. But True Corporation managed to deliver a +300,000 net subscriber additions for the postpaid segment in 1Q2020, while the company’s peers achieved flat to negative net subscriber addition growth for the postpaid segment in the last quarter.

True Corporation’s channel partnerships with its sister companies played a key role in its mobile business’s outperformance. True Corporation is a subsidiary of Thai conglomerate The Charoen Pokphand Group, which is one of the largest private companies in the country. The Charoen Pokphand Group’s other listed subsidiaries include CP All Public Company Limited (OTCPK:CPPCY) (OTCPK:CVPUF) [CPALL:TB], which in turn has a majority stake in Siam Makro Public Co., Ltd. (OTC:SMKPF) (OTCPK:SMKUY) [MAKRO:TB]. CP All has a franchise to operate 7-Eleven stores in Thailand, while Siam Makro runs cash & carry stores in the country.

True Corporation has a “shop-in-shop” model where its mobile business has physical points of sales in 800 7-Eleven stores and 50 Siam Makro cash & carry stores in Thailand. Furthermore, True Corporation’s mobile SIM cards are available for purchase in all of CP All’s 12,000-plus 7-Eleven stores in Thailand. In contrast, True Corporation’s competitors faced serious challenges in engaging with existing and potential subscribers, as most non-essential retail businesses in Thailand had to be closed due to lockdown measures as a result of the coronavirus pandemic. The company’s “shop-in-shop” business model made possible via its channel partnerships with its sister companies is a structural competitive advantage that it has over its peers.

Also, competition in Thailand’s mobile market has eased slightly. At the company’s 1Q2020 earnings call on May 19, 2020, True Corporation noted that the mobile operators are “starting to tone down the intensity of the competition”, which is “a clear trend in the industry.” As an example, industry players are beginning to introduce caps on total data usage for new mobile plans.

Weakness In Broadband And Pay Television Segments

Unlike the mobile business, True Corporation’s broadband and pay television businesses did not perform as well in 1Q2020.

True Corporation’s broadband business saw a marginal +1% QoQ growth in core service revenue last quarter. More importantly, a +55,000 net subscriber additions in the broadband segment was offset by a -6% QoQ decrease in broadband APRU (Average Revenue Per User) to Bt533 per month. The company launched cheap broadband plans in 1Q2020 (e.g. 200Mbps broadband plan that cost Bt289 per month) in response to similar offers from competitors.

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Intense competition could continue to be a drag on the broadband business’s ARPU and revenue growth going forward, with True Corporation acknowledging at its 1Q2020 earnings call on May 19, 2020, that there is “rather high competition in the broadband market, particularly in the low-tier areas.” Any surprises on the upside for the broadband segment will come from True Corporation’s cross-selling and upselling efforts to stem the decline in broadband ARPU.

True Corporation’s pay television business was an even bigger disappointment, as its segment revenue of Bt2.6 billion in 1Q2020 represented YoY and QoQ declines of -10% and -14%, respectively. The pay television business earns money from both subscription and advertising, and True Corporation stated in the company’s 1Q2020 press release that the “absence of entertainment events and live-sports postponement” was negative for the pay television business.

Specifically, the English Premier League, or EPL, is a key sporting content for the pay television market in Thailand. Matches in the English Premier League have been suspended since mid-March 2020, but a restart is expected on June 17, 2020. Nevertheless, True Corporation voiced concerns at the company’s 1Q2020 results briefing on May 19, 2020, that “the value of EPL (without a live audience) may not be as high as the normal EPL.”

5G Capital Expenditures, Financial Position, And Refinancing Risks

True Corporation guided for Bt40-60 billion in capital expenditures relating to 5G for the next three to five years. The company’s planned 5G capital expenditures are lower than expected. This is because True Corporation believes that the 5G adoption rate in Thailand in 2020-2021 is “very low”, and it is only investing in “5G to offload 4G (ease constraints on 4G capacity) in the beginning” as per its comments at the 1Q2020 earnings call on May 19, 2020. Notably, True Corporation also has no plans to bid for the 3.5-GHz spectrum at an upcoming auction.

If True Corporation’s 5G capital expenditures are maintained at a reasonable level going forward, this will help to avoid a further deterioration in the company’s financial position. As of end-1Q2020, True Corporation remains highly leveraged with a net debt-to-EBITDA of 5.1 times and a net debt-to-equity ratio of 2.3 times.

True Corporation raised approximately Bt10 billion from the issuance of new debentures in May 2020 to refinance existing debt. Options available for True Corporation to refinance or repay its borrowings maturing this year include issuing more debentures, taking on additional bank loans, accelerating the collection of tax refunds from the authorities, and selling shares in its 29%-owned Thailand-listed telecommunications infrastructure fund Digital Telecommunications Infrastructure (OTC:TTMMF) [DIF:TB].

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At the company’s 1Q2020 results briefing on May 19, 2020, True Corporation emphasized that “we believe that we still have enough funding sources to go through this volatile period.”

Valuation

True Corporation trades at 13.7 times trailing 12 months’ EV/EBITDA and 10.2 times consensus forward next 12 months’ EV/EBITDA based on its share price of Bt3.54 as of June 15, 2020. In comparison, the stock’s historical 5-year and 10-year average consensus forward next 12 months’ EV/EBITDA multiples were 9.2 times and 9.0 times, respectively.

The stock is also valued by the market at a consensus forward next 12 months’ EV/EBIT multiple of 46.6 times, and the company is expected to be loss-making in FY2020.

True Corporation offers consensus forward FY2020 and FY2021 dividend yields of 0.2% and 0.8%, respectively.

Peer Valuation Comparison For True Corporation

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
Advanced Info Service Public Company Limited (OTCPK:AVIFY) (OTCPK:AVIVF) [ADVANC:TB] 8.4 17.5 19.5 3.6%
Total Access Communication Public Company Limited (OTCPK:TACYY) (OTC:TACJF) (OTC:TCCMF) [DTAC:TB] or DTAC 5.6 18.1 19.4 3.4%

Source: Author

Risk Factors

The key risk factors for True Corporation are continued weakness for the company’s broadband and pay television businesses, a further deterioration in the company’s financial position, and an inability to refinance or repay debt due for maturity this year.

Note that readers who choose to trade in True Corporation 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.