4Q02 loss and slowdown in network solution business to cap UCOM's near-term upside 

We have downgraded our recommendation on United Communication Industries Plc. (UCOM) from ACCUMULATE to SWITCH. This is due to: 1) a slump in 4Q02 earnings; 2) limited growth potential in 2003; and 3) hefty sales of UCOM shares by a major shareholder, the Somers group. Although UCOM is now trading at less than half of our RNAV estimate of Bt22.5/share, we don’t see much upside potential for the stock in the near-term. Accordingly, we advise short-term investors holding UCOM to SWITCH into more solid telecom stocks such as ADVANC or SHIN.

We expect UCOM to report a 4Q02 loss of Bt308mn – its first quarterly loss since 2001 - after selling 1.5mn shares of Interwave Communication International (IWAVE) at $0.25 each and booking a one-off loss of Bt800mn. The investment write-down, coupled with a decline in revenue from its network solution and handset distribution businesses, should see UCOM’s 2002 net profit plunging 68% yoy to Bt534mn, sharply lower than our previous forecast of Bt887mn.

The company’s EBITDA margins in 4Q02 are expected to widen to 12.9% from 9.8% in 3Q02 due to firmer prices for handsets amid less intensive competition. Contributions from its 42%-owned subsidiary DTAC will decline, however, following a drop in DTAC’s net additions to 0.32mn subscribers versus 0.88mn in 3Q02.

Another negative factor for UCOM is a slowdown in its network solution business. Management told us the backlog value of projects is now just Bt1bn compared to Bt2-3bn a year ago due mainly to a slowdown in the expansion of DTAC’s network. Nevertheless, UCOM should generate network solution revenues of Bt5bn in 2003, similar to last year’s level, thanks to it securing a few large government projects.

UCOM is aiming to boost handset sales by 25% to 1.5mn units this year. We believe this target is too ambitious, however, given the drop in DTAC’s net subscriber additions, the unlocking of IMEIs and uncertainty regarding the size of the replacement market.

UCOM’s share price has also come under pressure after one of its major shareholders, the Somers Group, reduced its stake in UCOM from 29% to 13-15%. There is little prospect for a share price recovery if the Somers Group continues to reduce its stake.

In valuation terms, UCOM looks attractive as a long-term investment. The stock

is trading at a huge 53% discount to our RNAV of Bt22.5 and very low 2003 EV/EBITDA of 2.55x.