• Estimate 1Q18F profit at Bt7.9bn (+3% qoq, +3% yoy); strong operation but resume prepaid handset subsidy in Feb
• Expect new offer of 10% discount to customers who pay AIS bill on Rabbit LINE Pay to have limited impact
• OUTPERFORM, TP Bt220; ADVANC has the best core earnings outlook and limited risk of auction delays

1Q18F earnings to grow qoq and yoy

We expect ADVANC to report Bt7.9bn net profit for the quarter, up 3% qoq and 3% yoy, driven by two months’ consolidation of CSL, lower regulatory cost, and 1% qoq and 5% yoy increase in service revenue ex. IC to Bt33bn. Regulatory cost should increase 50bps qoq to 4.5% as there was a one-time adjustment in 4Q17, but should fall 1.3ppt yoy. Handset margin is estimated at -2% as ADVANC has resumed prepaid handset subsidy since February in some areas, which should also take SGA costs to Bt6.1bn (+12% yoy). This is because some of handset subsidy expense would be booked under marketing expenses. Overall, 1Q18F profit should account for 23% of our full-year forecast. Results will be released on 10 May.

Expect limited impact from Rabbit LINE Pay promotion

After acquiring 33% stake in Rabbit LINE Pay (RLP), ADVANC is offering 10% discount to customers who pay their bills through RLP channel starting Mar–Aug. This should have limited impact on service revenue ex. IC in 2Q-3Q18 as the discount is capped at Bt50/mth, and ADVANC claims that payments made through RLP have been minimal so far. The decision to resume prepaid handset subsidy should not affect full-year guidance as it is targeted at a specific group. Therefore, we keep FY18F earnings at Bt34bn (+13% yoy). Note that we assumed ADVANC would secure 15MHz of 1800MHz spectrum at the next auction, and the lump sum final payment for 900MHz of Bt60bn would be in FY20F.  

OUTPERFORM, DCF-based TP Bt220; top pick in Telecom sector

Despite less than 10% upside to our target price, the 3.9% dividend yield would take total return to 12.3%. ADVANC will continue to stand out against peers due to (i) its superior core earnings momentum, (ii) less urgent need for new spectrum in the event the next auction is delayed because the caretaking NBTC hands over reins to a new board, and (iii) decent dividend yield.