DTAC is scheduled to release its 1Q09 results after market close on 29 Apr. 1Q09 results should regain momentum from a weak seasonal 4Q08, with a core profit ofTHB1.3bn-1.4bn expected, up 7-10% qoq. Results should also rebound after four quarters of consecutive declines. We expect a 1.5% qoq increase but 6% yoy drop at the topline from receding industry competition, improving tourist arrivals and continuing growth in data revenue.

With the industry shifting its focus to customer retention from new acquisitions, subscriber growth is likely to slow down to single digits from double digits over the years. Nevertheless, DTAC should still see growth in rural areas with some churns in cities where users tend to be multiple SIM holders.

Solid outlook but exciting news has been put on hold. DTAC’s outlook for the rest of the year should be subdued along with the economy, but it should still benefit from the defensiveness of its business and receding competition. The long-awaited award of 3G licences seems to have been put on hold once again by political strife, but we believe that progress will resume when political conditions improve.

Cost-savings to take effect in 2H09. A decline in profit margin, from 13.5% in 1Q08 to 7.5% in 4Q08 (Figure 1), could be blamed on a weakening interconnection balance and higher S&GA expenses (legal and marketing expenses) on top of slow sales growth. However, receding competition should ease marketing expenses and other discretionary expenses. The positive impact is likely to be marginal in 1Q09, with more effects from the company’s cost-cutting programme to be felt in 2H09, in our opinion.

Maintain Outperform and DCF-based target price. DTAC’s share price has been dragged down more than ADVANC’s, as risk-averse investors preferred the latter’s superior balance sheet, dividend yields and quality earnings. At 6.6x CY10 P/E, DTAC trades at a 43% discount to ADVANC, but down from the 80%+ discount in March. DTAC appears cheap given investors’ improving risk appetite.

We keep our Outperform rating and target price of THB36.00, based on DCF valuation (12.6% WACC and 2% terminal growth). Our target price implies 8.9x CY10 P/E.