Fitch Ratings-Bangkok-: Total Access Communication Public Company Limited's (DTAC; AA(tha)/Stable) unexpectedly high dividend payout ahead of a 5G investment cycle underscores a more aggressive shareholder return policy that may further delay deleveraging, says Fitch Ratings.

DTAC's board of directors approved a final dividend of TH2.12 per share on 29 January 2021. This, together with the interim dividend of THB0.87 per share paid in August 2020, translates to a 100% payout of 2020's net profit. The dividend payment, which is still subject to shareholders' approval at the annual general meeting, will be the third straight year that the dividend payout ratio has increased, from 75% in 2019 and 50% in 2018. We expect dividends in 2021 to account for more than 25% of DTAC's cash flow from operations, compared with the average 19% during 2018-2020.

The Thai operator already faces a high capex burden, while struggling to stabilise its revenue and profitability. Its reluctance to restrain shareholder distributions will weaken its balance sheet, putting further pressure on its ratings. Fitch expects DTAC's ratings headroom to narrow over the next two years. Funds from operations (FFO) net leverage for DTAC is likely to increase to around to 2.2x in 2021 (2020: 2.0x), close to the 2.3x threshold at which Fitch would consider negative rating action.

DTAC's pre-dividend free cash flow (FCF) is likely to turn negative in 2021 (2020: neutral) due to weaker operating cash flows and an increase in capex. Fitch expects DTAC's capex (excluding spectrum payments) to increase to around 25% of service revenue (excluding interconnection charge) in 2021 from 17% in 2020, as the company accelerates investments to reduce the network-quality gap with rivals.

We expect DTAC's market position to remain under pressure in 2021 due to tough competition, while rivals undertake aggressive capex and spectrum investment in 5G network to extend their lead in network quality. Fitch expects DTAC's service revenue (excluding interconnection revenue) to continue to decline at a low-single-digit rate in 2021 (2020: down 4.6%), as the company's market share could continue to shrink. DTAC's service revenue has fallen in six of the last seven years and its service revenue market share declined to 23% in 9M20 from around 30% in 2015.

DTAC will also need to secure additional spectrum, particularly the mid-band 3.5GHz spectrum, to support its 5G rollout, although the availability of the frequency band is uncertain given that it is presently used by satellite broadcasting services. Narrowing rating headroom and negative pre-dividend FCF suggest that DTAC may have less flexibility to fund spectrum investments in the medium term. Fitch believes prudent capital preservation, including discretionary shareholder returns, will help operators to reserve balance sheet strength to step up spectrum investment when needed.

Contact:

Obboon Thirachit

Director

+662 108 0159

Fitch Ratings (Thailand) Limited

Level 17, Park Ventures,

57 Wireless Road, Lumpini, Patumwan

Bangkok 10330

Janice Chong

Director

+65 6796 7241

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com

Additional information is available on www.fitchratings.com

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