I retain my 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 June 16, 2020. True Corporation’s share price has declined by -15% from Bt3.54 as of June 15, 2020 to Bt3.02 as of October 7, 2020, since my last update. True Corporation trades at 8.4 times consensus forward next 12 months’ EV/EBITDA, and it offers a consensus forward FY 2021 dividend yield of 0.7%.
True Corporation’s recent sale of a 2.8% stake in a telecommunications infrastructure fund puts the company’s negative free cash flow and future capital expenditures in the spotlight. Also, True Corporation’s underlying financial performance in 2Q 2020 was not as good as what its headline numbers suggest. The company is expected to be loss-making and generating negative free cash flow this year and next year.
I maintain a Neutral rating on True Corporation, as I think that the company has sufficient options to fund its future capital expenditures. In addition, competition in the Thai mobile market has eased in 2Q 2020, due to a smaller prepaid subscriber market with fewer tourists and migrant workers as a result of Covid-19.
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 $5 million, and market capitalization is above $3.2 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 Eaton Vance Management, The Vanguard Group, MFC 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 or Fidelity, or international brokers with Asian coverage, like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.
Reduction In Stake In Infrastructure Fund To Finance Capital Expenditures
On September 30, 2020, True Corporation announced that it sold 298.1 million units or a 2.8% stake in Thailand-listed telecommunications infrastructure fund Digital Telecommunications Infrastructure Fund (OTC:TTMMF) [DIF:TB] or DIF. Following the sale, True Corporation’s stake in DIF was reduced from 26.183% to 23.379%. Nevertheless, True Corporation emphasized in the company’s announcement regarding the stake sale that DIF is a “strategic investment and the Company will continue to hold investment units of the Fund for the long term.”
True Corporation is estimated to have derived divestment proceeds in excess of Bt4 billion from the recent stake sale in DIF. The sale of DIF units drew attention, because True Corporation generates negative free cash flow and has significant capital expenditure commitments in the next couple of years.
At the company’s 2Q 2020 earnings call on August 17, 2020, True Corporation acknowledged that “our free cash flow will still be negative for the next one to two years.” Earlier, True Corporation guided at its 1Q 2020 results briefing on May 19, 2020 that it expects 5G-related capital expenditures to amount to approximately Bt40-60 billion for the next three to five years. The company already spent around Bt17 billion in capital expenditures in the first half of this year. Notably, True Corporation’s net debt-to-equity ratio or net gearing was relatively high above two times as of June 30, 2020.
True Corporation’s reduction of its stake in DIF draws attention to the company’s significant capital expenditure needs. Apart from a further divestment of units in DIF following a 90-day lock-up period, True Corporation still has other options to fund its future capital expenditures, which include the accelerated collection of tax refunds from the authorities, and the issuance of debentures.
True Corporation received approximately Bt9 billion in Value-Added Tax or VAT refunds in 2Q 2020, and the company expects another Bt4-5 billion in VAT refunds in 3Q 2020. Separately, the company also issued new debentures in May 2020, which raised approximately Bt10 billion in financing proceeds for the company.
Underlying Financial Performance In 2Q 2020 Was Not As Good As What Headline Numbers Suggest
True Corporation announced the company’s 2Q 2020 financial results on August 17, 2020, and the company’s underlying financial performance in 2Q 2020 was not as good as what its headline numbers suggest.
True Corporation reported a headline net profit attributable to shareholders of Bt1,262 million in 2Q 2020, as compared to a net loss attributable to shareholders of -Bt161 million in 1Q 2020. The company benefited from one-off items such as a divestment gain from the sale of 300 million DIF units in June 2020 (separate from the recent sale in September) and a foreign exchange gain of Bt276 million. Excluding these one-off items, True Corporation’s adjusted core net loss attributable to shareholders would have been -Bt847 million in the second quarter of the year.
Specifically, True Corporation’s 2Q 2020 bottom line was hurt by higher depreciation and interest expenses. The company’s depreciation & amortization expenses grew by +60.4% YoY and +5.0% QoQ to Bt10,385 million in 2Q 2020, mainly due to an increase in depreciation costs associated with the new 2600MHz spectrum. True Corporation’s net interest expenses also increased by +24.0% YoY and +6.4% QoQ to Bt2,191 million in the second quarter of the year, as a result of additional borrowings.
On the positive side of things, True Corporation’s core mobile services business performed very well in 2Q 2020. The company was the only one among the three mobile players in Thailand to achieve positive mobile service revenue growth on both a QoQ and a YoY basis in the most recent quarter. True Corporation’s mobile service revenue increased by +0.4% QoQ and +3.3% YoY to approximately Bt20 billion in 2Q 2020. Furthermore, True Corporation added the most number of postpaid mobile subscribers (ongoing prepaid to postpaid migration) and lost the least number of prepaid mobile subscribers (decline in tourist and migrant worker subscribers) on a net basis among the three major mobile companies in Thailand.
True Corporation’s superior performance in the mobile business as compared to its peers was attributable to two key reasons.
Firstly, True Corporation was relatively less impacted by lock-down measures implemented in Thailand in 2Q 2020, as the company’s physical points of sales in hundreds of 7-Eleven stores and Siam Makro (OTC:SMKPF) (OTCPK:SMKUY) [MAKRO:TB] cash & carry stores in Thailand remained open during this period. True Corporation is a subsidiary of Thai conglomerate The Charoen Pokphand Group, and its sister companies include CP All Public Company Limited (OTCPK:CPPCY) (OTCPK:CVPUF) [CPALL:TB], which owns the franchise for 7-Eleven stores in Thailand, and Siam Makro.
Secondly, True Corporation seems to have been more prepared for digital transformation compared with its peers and competitors. For example, the company has been gradually migrating its subscribers to online bill payments and top-ups even prior to Covid-19, which meant that True Corporation lost a fewer number of mobile subscribers due to lock-down measures which restricted access to physical sales channels. Notably, more than three-quarters of True Corporation’s prepaid subscribers did top-ups through either online or self-service channels in 2Q 2020, while the company acquired over a fifth of new subscribers from online sales channel over the same period.
Potential Tipping Point For Mobile Competition In Thailand With The Pandemic
Intense competition in the Thai mobile market, particularly in the pre-paid segment, has been negative for the industry and True Corporation as well in the past.
The coronavirus pandemic could be a potential tipping point for mobile competition in the country. True Corporation highlighted at its 2Q 2020 results briefing on August 17, 2020 that “the intensity of price war actually is decreasing (in Q2) versus we can see in Q1.” The key driver for the easing of mobile competition in Thailand in 2Q 2020 is the decrease in tourists and migrant workers (which form a substantial proportion of the prepaid subscriber base) due to Covid-19. With the prepaid subscriber market shrinking, there were limited incentives for the mobile players to engage in price wars.
True Corporation also added at the recent 2Q 2020 earnings call that “all three competitors learned our lessons” that “that once one operator starts to lower the price, the other two just simply follow.” In other words, there is no sustainable competitive edge with cutting prices, and it is only consumers that benefit from the price competition between the Thai mobile players.
True Corporation trades at 12.0 times trailing 12 months’ EV/EBITDA and 8.4 times consensus forward next 12 months’ EV/EBITDA based on its share price of Bt3.02 as of October 7, 2020. As a comparison, the stock’s five-year mean consensus forward next 12 months’ EV/EBITDA multiples were 9.1 times and 9.2 times, respectively.
True Corporation is valued by the market at 43.2 times consensus forward next 12 months’ EV/EBIT, and it is expected to be loss-making for both FY 2020 and FY 2021.
The stock offers consensus forward FY 2020 and FY 2021 dividend yields of 0.4% and 0.7%, respectively. Sell-side analysts see True Corporation’s full-year dividends per share decreasing from Bt0.090 in FY 2019 to Bt0.013 in FY 2020, prior to increasing to Bt0.020 in FY 2021.
As per the peer valuation comparison table, True Corporation’s valuations are not as attractive as that of its peers, based on metrics such as EV/EBITDA, EV/EBIT and dividend yield.
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 FY2021 Dividend Yield|
|Advanced Info Service Public Company Limited (OTCPK:AVIFY) (OTCPK:AVIVF) [ADVANC:TB]||7.4||16.3||17.8||4.1%|
|Total Access Communication Public Company Limited (OTCPK:TACYY) (OTC:TACJF) (OTC:TCCMF) [DTAC:TB] or DTAC||4.9||15.3||19.3||4.5%|
The key risk factors for True Corporation include a failure to fund the company’s future capital expenditures, higher-than-expected 5G capital expenditures, and stiffer-than-expected competition in the Thai mobile market.
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.