Weaker 4Q02 results from TAO and non-recurring items

TelecomAsia Corporation Plc. (TA) last week reported a net loss of Bt5.4bn in 2002, worsening from the Bt3.4bn net loss in 2001 but in line with our previous estimate of Bt5.2bn. TA's higher loss was mainly from a proportionate consolidation of TA Orange's losses and larger losses from non-recurring items.

In 2002, TA consolidated a net loss of Bt335mn from TA Orange (TAO). This was from the booking of its portion of TAO's net loss of Bt2.7bn, which was partially offset by the amortisation of negative goodwill of Bt2.3bn from the TAO acquisition.

Meanwhile, TA incurred non-recurring losses of Bt8bn, mostly from the write-down of its FLAG and IN investments. Including non-recurring gains on other items, mostly its DPN buy-back, TA recorded a net extraordinary loss of Bt3.7bn in 2002.

We expect to see lower losses in TAO's operation in 2003 based on 1) the company ceasing its handset subsidy programme, which was used last year to gain market share, 2) ARPU stabilising, 3) new revenue stream from non-voice services, 4) a slow down in capex and 5) less aggressive marketing programmes. We assume that TAO will gain another 1-1.5 million subscribers in 2003 and should be able to maintain its blended ARPU at Bt500-550 per month. However, net loss contributions from TAO will have a bigger impact on TA's bottom line this year after the company completed its amortisation of goodwill in 4Q02.

Based on its normalised performance (excluding TAO and non-recurring items), TA would have made a loss of Bt1.2bn, which is at least an improvement over the Bt3.4bn normalised loss in 2001. Meanwhile, TA's cash operating profit increased by 15% to Bt12bn in 2002 while its EBITDA margin improved to 51% from 49.5%.

TA's revenue from fixed line services grew by 3.2% in 2002 with stabilised operating margins of 30%. In 2003, TA's fixed-line business strategy has already changed to be more defensive, unlike an offensive strategy employed over the last two years. TA had aggressively offered several bundled packages in order to expand its subscriber base. The net result was a capacity utilisation of 80% to 2.05mn used lines by the end of 2002. TA has resumed charging Bt3,350 installation fee to new subscribers starting in early 2003. Instead, the company is focusing on existing customer maintenance programmes. Regarding this new strategy, TA is likely to report the first drop in its subscriber base in 1Q03 as well as expenses for churn rate reduction and bad debt control. TA is expected to maintain a 2mn subscriber base in 2003. However, TA's management seems confident to maintain its fixed-line ARPU at a level of Bt550-600 per month this year.

In 2002, TA's PCT business had to struggle with hard competition from the cellular side. As a result, PCT customers declined by 4% to 0.6mn and its ARPU contracted from Bt440 to Bt361 per month. The revenue from PCT service then decreased by 4% to Bt2.9bn.

In 2003, TA's PCT business will focus on three segments of customers 1) high school students, 2) corporate groups and 3) data consumer groups. Amid the stiff competitive environment of mobile market, the revenue from PCT business should further decline by 8-12% in 2003, assuming a 0.55mn subscriber base and Bt320-350 ARPU at the end of 2003.

We expect that the data business will continue to be an earnings driver for TA in 2003. In 2002, the revenue from data services grew by 52% to Bt1.8mn and operating margins increased from 10% to 45% in 2002. The digital data network (DDN) business grew by 49% in revenue to Bt629mn excluding connected revenue from TAO. We expect to see the revenue portion of data services to rise from 9% to 15-20% in 2003.

TA has managed to stabilise its balance sheet status by eliminating a total of US$453mn foreign debt exposure after issuing Bt21.8bn in Thai baht debentures and new local borrowing of Bt1.1bn. This has raised its average financial cost to 6%. Also, TA was successful in buying back Bt3.6bn of deferred payment notes (DPN) at an 81.3% discount from the book value. Excluding about Bt4.7bn proportionate new borrowing of TAO and net effect from foreign exchange, TA was expected to have a better debt position of Bt60.5bn in total long-term borrowing (including the current portion), a decrease of 6% yoy. TA's long-term debt-to-equity ratio continued to improve from 13.1x to 8.4x in 2002, but it is still much higher than an industrial average. Recently, TA is dealing with a restructuring scheme on PCT's yen-denominated long-term supplier credit of Bt8bn and expects to finish by 1H03.

TA's share price has significantly underperformed the market due to market concerns about the future earnings prospects of PCT and TAO. The market is still waiting to see any improvement in these two companies operations this year. TA's management claims that it can revitalise PCT and TAO will reach EBITDA breakeven this year.

In our view, TA is worth Bt10 per share. Currently, the stock is trading at a steep discount of 55% to this fair value estimate and on undemanding 2003 EV/EBITDA of 5.33x. Accordingly, we are maintaining our ACCUMULATE recommendation on TA.