We believe Thailand has moderate competition with wireless penetration of more than 100%. However, we anticipate that competition could intensify after all three companies--including AIS--in Thailand's telecommunications market launch 3G services on their recently acquired licenses. We believe AIS will receive the spectrum by about mid-January next year.
AIS' operating performance in the nine months ended Sept. 30, 2012, is better than our expectation, with revenue increasing 10.8% to Thai Baht (THB) 103.4 billion. Performance improved because revenue from the voice business continued to grow and non-voice revenue rose 33%. An increase in mobile data users and data usage aided growth in the non-voice segment. The company's EBITDA margin remains strong, and fairly stable, at 45%.
We view AIS' financial risk profile as "modest." We expect the company's financial ratios to remain strong for the rating. Its ratio of funds from operations (FFO) to debt has always remained above 75%, and its debt-to-EBITDA ratio has not gone above 1x over the past five years. We expect this trend to continue even after AIS pays 50% of the 3G license cost of THB14.6 billion and the related capital expenditure. Our financial ratios include our conservative adjustment for AIS' guarantees to government-owned telecommunications company TOT Public Co. Ltd.
AIS' capital expenditure was low over the past three to four years. However, we expect capital expenditure to increase significantly with AIS winning the 3G license. We believe the company has more than enough cash flow to accommodate additional 3G-related capital expenditure. We expect this expenditure to be about THB50 billion over the next three years.
Thailand continues to have above-average regulatory risk, although we believe the risk is moderating, particularly after the much delayed 3G license auction. Uncertainty still surrounds the conversion of existing concessions--some of which expire next year--into licenses. For example, a concession agreement of an AIS subsidiary that holds spectrum in the 1,800 megahertz (Mhz) band expires in September 2013. The regulator plans to auction this spectrum early next year to address the expiry of concessions.
We believe 3G licenses could help telecom companies grow and improve their profitability in the next three to four years. This is because the companies can provide higher-value 3G services, and the license fee for 3G is much lower than the existing concession fee. However, our expectation assumes that companies would accrue the benefits after they achieve fair scale in their 3G subscriber base and that the regulator will not impose tariff control, which constrains profitability.
AIS, like other telecommunications companies in Thailand, also faces risk from various legal disputes. Most of AIS' disputes are with TOT. However, the risk partly reduced in 2011 with TOT withdrawing its claim for THB37 billion of compensation from AIS for two revenue sharing agreements where the percentages were reduced several years ago, allegedly to benefit AIS.
Standard & Poor's base-case scenario for AIS indicates the company's financial ratios will remain strong with the debt-to-EBITDA ratio at less than 1.0x and the FFO-to-debt ratio above 85% over the next three years. Our forecast considers the increase in the company's debt in 2013 and 2014 due to negative discretionary cash flow. Our projections are based on the following assumptions:
-- Revenue would grow by about 8% in 2012 and the growth rate will fall to about 5% in 2014 based on our expectation that: (1) subscribers will continue to grow by 7% in 2012 and that growth will fall to 3% in 2014; (2) voice average revenue per user (ARPU) would decline by about 2% annually; and (3) non-voice ARPU would grow by about 15% for the next two years.
-- EBITDA margin will be stable at about 44.5%.
-- Capital expenditure will increase to 24% of revenue (excluding handset sales) in 2013 and 19% of revenue in 2014, from 7% of revenue in 2012.
-- The payment for the 3G spectrum will be about THB7.3 billion in 2012 and THB3.7 billion in 2014.
-- The dividend payout ratio will be 110%.
Our assessment of AIS' liquidity is "strong," as defined in our criteria. We expect the company's sources of liquidity to exceed its uses by more than 1.5x during the next 24 months. We anticipate that AIS' net liquidity sources will remain positive even if EBITDA declines by 30%. Our liquidity assessment is based on the following factors and assumptions:
-- As of Sept. 30, 2012, liquidity sources include cash and short-term investments of about THB22.5 billion and unused credit facilities of US$275 million.
-- Sources also include our projected FFO of at least THB40 billion annually.
-- Uses of liquidity include debt due in the next 12 months of THB8.4 billion.
-- Uses also include capital expenditure of THB15 billion, which we believe is mostly for the rollout and maintenance of the 3G spectrum, our assumption of THB7.3 billion for the acquisition of 3G spectrum, and our expectation of dividend distribution of THB15 billion, even in case of stress.
AIS also has significant headroom under its covenants.
The stable outlook reflects AIS' resilient operating performance and strong financial credit protection measures. It also reflects our expectation that the company will manage the ongoing regulatory evolution in Thailand (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1) without a material deterioration in its competitive position or financial ratios.
We may lower the rating if AIS' debt-to-EBITDA ratio approaches 1.5x. This could happen if the company's 3G-related capital expenditure far exceeds our expectation or its operating performance weakens materially. We could also downgrade AIS if regulatory or legal disputes result in material adverse effects on the company's operations or financial ratios. The upside potential is currently limited, in our view, at least until the nature and implications of the evolving regulations become clearer.