1CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
DIAL – Rs.14.5
Dialog Axiata
Sanjeewa Fernando
email : [email protected] : +94 777 427439
Sri Lanka
Telecommunications
31 May 2018
CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPSCTL impact of ~Rs.5bn for 2018E (w.e.f. 1 Apr 2018) is not expected to be implemented and thus not factored into our forecasts
Key Trading Information
Shares in Issue (mn) 8,143.8
Market Cap (US$ mn) 748.4
Estimated Free Float (%) 16.7
3M Avg Daily Volume 901,366.3
3M Avg Daily Turnover (US$) 79,950.4
12M High / Low (Rs) 14.8/11.2
3M / 12M Price Chg (%) 7.4/23.9
Key Highlights
1Q2018 Results Update
DIAL reported a 1Q2018 net profit (NP) of Rs.2,842mn (+84% YoY and -10% QoQ), broadly
in line with our expectations, driven by revenue growth and improved EBITDA margins
With a resultant 4 player market in the near term owing to the already announced Hutch and
Etisalat merger, DIAL may also find it cost efficient to fast track a possible merger option with
Airtel, i.e. the remaining smaller telco in SL, in order to increase DIAL’s profitability resulting
in a healthy mobile operator market in the medium to long term
DIAL’s NP forecasts for 2018E and 2019E are revised down by -3% and -5% to Rs.12,054mn
(+12% YoY) and to Rs.13,885mn (+15% YoY) on account of revised finance costs
The share outperformed the market during the past year, rising +24% compared to ASI’s -
4% decline. During past 3 months DIAL share continued to outperform the market by rising
+7% compared to the market’s -2% decline
On revised earnings, DIAL trades at PERs of 9.8X for 2018E and 8.5X for 2019E, with
EV/EBITDA multiples of 3.8X for 2018E and 3.5X for 2019E and provide relatively high ROEs
of 19% - 21% in the short to medium term
We believe that the recent re-rating of the share is justified given DIAL’s recently improved
earnings fundamentals. A potential merger / acquisition between DIAL and Airtel (the
remaining acquirable candidate) could remain as a further catalyst to improve and sustain
the share price in the short to medium term
Relative Share Price Movement (%)
Financials - Year to 31 December 2015 2016 2017 2018E 2019E
Revenue (Rs mn) 73,930 86,745 94,196 104,558 113,968
Net Profit (Rs mn) 5,187 9,026 10,785 12,054 13,885
Earnings per Share (Rs) 0.6 1.1 1.3 1.5 1.7
Earnings per Share Growth (%) -11.7 74.0 19.5 11.8 15.2
Price / Earnings Ratio (X) 16.8 9.5 9.9 9.8 8.5
Gross Dividends per Share (Rs) 0.3 0.4 0.4 0.4 0.4
Gross Dividend Yield (%) 3.0 3.7 3.1 2.9 2.9
EV / EBITDA (X) 4.4 3.8 4.0 3.8 3.5
Return on Equity (%) 11.3 17.8 18.6 19.4 20.5
Market Price per Share (Rs) 10.7 10.5 13.1 14.5 14.5
ASI
DIAL
90
100
110
120
130
30-May-17 27-Nov-17 30-May-18
EQUITY REPORT TITLE | DateA CT HOLDINGS GROUP AND CLSA GROUP COMPANY 2A CT HOLDINGS GROUP AND CLSA GROUP COMPANY
The Business
Dialog Axiata (DIAL), an 83.3% owned subsidiary of the Malaysian Axiata Group, is Sri Lanka’sleading mobile telco (estimated SIM market share of 44.2%), and also has a strong presence inbroadband, tele-infrastructure, Pay TV and CDMA (Code Division Multiple Access)
Recent Financial Performance
DIAL reported a 1Q2018 net profit (NP) of Rs.2,842mn (+84% YoY and -10% QoQ), broadly
in line with our expectations, driven by revenue growth and improved EBITDA margins
Quarterly Highlights
Revenue rose +18% YoY (+5% QoQ) to Rs.26,083mn in 1Q2018 largely driven by growth indata revenue due to increased small screen penetration. Telco data levy of 10% was removedw.e.f. 1 September 2017 resulting in the effective indirect tax on data reducing from 31.7%to 19.7%
o Mobile Data revenue rose +7% QoQ in 1Q2018 due to increased small screenpenetration and 4G conversion
o Fixed Home Broadband Revenue rose +17% QoQ and +49% YoY in 1Q2018,amid expanding network coverage and aggressive subscriber acquisitions
o Television revenue rose +9% QoQ and +9% YoY in 1Q2018 driven by increasedsubscription revenue and advertising revenue
o International Termination Revenue rose +12% QoQ and +27% YoY in 1Q2018due to growth in wholesale business coupled with a temporary ban on OTT (FB, Viberand whatsapp etc.) usage during March 2018
Dialog Axiata
1Q2018 NP +84% YoY, -10% QoQ
DIAL: Subscriber Growth
DIAL : ARPU (Rs.) & EBITDA Margin (%)
DIAL: MOU and Growth
Note: Valuations and ratios on a recurring basis; Adjusted for capital issues (if any) Source: Company interims^ As at end period
Key Figures & Ratios (Rs mn) 4Q2017 1Q2017 1Q2018 % YoY % QoQ 2016 2017 % YoY
Revenue (Rs mn) 24,801 22,165 26,083 17.7 5.2 86,745 94,196 8.6
Operating Expenses (Rs mn) 15,701 14,944 16,124 7.9 2.7 57,533 60,345 4.9
EBITDA (Rs mn) 9,100 7,221 9,959 37.9 9.4 29,212 33,851 15.9
Depreciation (Rs mn) 5,102 4,342 5,699 31.3 11.7 16,369 19,109 16.7
Net Finance Income / -Cost (Rs mn) -467 -892 -973 9.0 >+100.0 -2,363 -2,355 -0.4
Net Profit (Rs mn) 3,171 1,546 2,842 83.8 -10.4 9,041 10,785 19.3
Earnings per Share (Rs) 0.4 0.2 0.4 83.8 -10.4 1.1 1.3 19.3
EBITDA Margin (%) 36.7 32.6 38.2 5.6 4.1 33.7 35.9 2.3
Average Revenue Per User - ARPU (Rs) 392.0 375.0 390.0 15.0 -2.0 396.0 387.0 -9.0
Minutes Of Use - MOU per month 118.0 123.0 118.0 -4.1 0.0 133.0 120.0 -9.8
Revenue Per Minute – RPM 3.3 3.0 3.3 8.4 -0.5 3.0 3.2 8.3
DIAL : Smart Phone Penetration 52.0% 47.0% 53.0% 12.8 1.9 45.0% 52.0% 15.6
Capex (Rs mn) 13,499 3,994 2,385 -40.3 -76.6 26,363 30,635 16.2
Capex Intensity (%) 54.4 18.0 9.1 -8.9 -45.3 30.4 32.5 2.1
Net Debt to EBITDA (X)^ 0.8 1.0 0.8 -0.2 -0.1 0.9 0.8 -0.1
1,100
1,200
1,300
1,400
9
11
12
1Q2016 1Q2017 1Q2018
Prepaid subscribers (mn) - LHS
Postpaid subscribers ('000)
31
33
35
37
39
370
390
410
1Q2016 1Q2017 1Q2018
Avg Revenue Per User (Rs)
Group EBITDA margin - RHS
-6
-3
0
3
112
122
132
142
1Q2016 1Q2017 1Q2018
Minutes of Usage (MOU) / Month
QoQ Growth (%) - RHS
EQUITY REPORT TITLE | DateCT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 3CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
Quarterly Highlights
EBITDA margin improved to 38.2% in 1Q2018 (from 32.6% in 1Q2017 and 36.7% in4Q2017) due to significantly reduced Sales & Marketing Opex (S&MO) to 10.9% of revenuein 1Q2018 (vs.14.6% in 4Q2017 and 15.2% in 1Q2017) as a result of adopting SLFRS 15w.e.f. 1Q2018 (as customer acquisition costs are capitalized under SLFRS 15)
Net Finance Costs (NFC) rose +9% YoY (+>100% QoQ) to -Rs.973mn in 1Q2018 due to arelatively volatile LKR (that includes a ~Rs.400mn FX loss in 1Q2018) and a relatively highLIBOR due to rising international interest rates. Meanwhile DIAL’s Net Debt increased byRs.2,430mn QoQ to Rs.30,615mn as at 31 March 2018 with Net Debt to EBITDA howeverfalling to 0.77X as at 31 March 2018 from 0.83X as at 31 December 2017 due to improvedEBITDA levels
Capex of Rs.2,385mn (-40% YoY, -77% QoQ) during 1Q2018 was directed towardsinvestments in High-Speed Broadband infrastructure consisting of capacity upgrades and LTEfocused coverage expansion. Investment in Data infrastructure included 4G capacityupgrades and 4G coverage expansion
The Government of Sri Lanka (GoSL) proposed Cellular Tower Levy (CTL: of Rs.200,000per tower per month from tower owning mobile companies - w.e.f. 1 Apr 2018) is highlyunlikely to be implemented (as it is) given the impracticality of the fiscal proposal
o If imposed, CTL will wipe off Rs.5bn p.a. from DIAL, given its ~2,100 tower ownership
DIAL purchased an 80.3% stake in Colombo Trust Finance (CTF) during 3Q2017 in order toleverage its presence in the E –commerce space via FinTech. During 4Q2017 DIAL furtherincreased its ownership in CTF to 98.9%, following the conclusion of the mandatory offer on2 November 2017. DIAL expects to commence its Digital bank from 2Q2018E
o Based on the CBSL guidelines, DIAL is expected to infuse ~Rs.500mn each from2018E to 2020E, to be compliant with Basel III capital regulatory requirements (for the2017 capital infusion of Rs.550mn, DIAL received a 6 month extension up to June 2018)
During late April 2018, Hutch – Sri Lanka announced its plans to merge with Etisalat– Sri Lanka, in order to remain relevant in a crowded 5 player market. If the deal isapproved by the regulator, resultant 4 players in the market will have the following spectrumand market shares
Sri Lanka Mobile-Telco Sector : Post Hutch + Etisalat Merger Scenario Analysis
Sri Lanka Mobile-Telco sector : Detail Spectrum Breakdown as at 31 Mar 2018
With a resultant 4 player market in the near term, DIAL may also find it cost efficient tofast track a possible merger option with Airtel, i.e. the remaining smaller telco in SL, inorder to help maintain DIAL’s industry dominance resulting in a healthy mobile operatormarket in the medium to long term
Dialog TV (DTV) meanwhile reported a net loss (NL) of -Rs.126mn (-23% QoQ) for 1Q2018compared to a NL of –Rs.736mn in 2017, largely driven by content costs (that are incurredin US$ terms: ~50% of DTV’s costs are incurred on content acquisition)
Further, Dialog Broadband Networks (DBN) reported a NP of Rs.605mn in 1Q2018 (+8%QoQ, >+100% YoY) compared to a NP of Rs.1.8bn for 2017, due to strong growth in FixedLTE Revenue. In 3Q2017, DIAL launched the pre-paid offering for Fixed Home Broadband inorder to expand affordability and to reach a wide spectrum of domestic Households
Subsidiary EBITDA Margins (%)
DIAL: Capex and Capex Intensity
Dialog Axiata
DTV Subscribers
LKR Change vs. Forex (Loss) / Gains
Post-Merger Scenario (Rank) DIAL (#1) MOB (#2) HUT + ETI (#3) AIR (#4)
Total Spectrum* (MHz) 127.5 50.0 50.0 22.5
Subscriber market share (%) 44.2% 28.0% 18.6% 9.2%
Estimated Customer base (mn) 13.0 8.1 5.4 2.7
Operator 2G - 900 MHz band 3G - 2100 MHz band 4G Fixed 2300 MHz band2G and 4G - 1800 MHz
band
DIAL 7.5 20.0 75 (15 MHz – 4G Fixed) 25.0 (10 MHz in 4G LTE)
MOB 7.5 15.0 - 27.5 (20 MHz in 4G LTE)
ETI 7.5 10.0 - 7.5
HUT 7.5 10.0 - 7.5
AIR 5.0 10.0 - 7.5
LTE = Long Term Evolution, MOB: Mobitel, HUT: Hutch – SL, ETI: Etisalat SL, AIR: Airtel SL
-4
-2
0
2
-550
-300
-50
1Q2016 1Q2017 1Q2018
Forex gain / (loss) Rs mn - LHS
US$:LKR change %
0
10
20
30
40
50
60
0
4
8
12
16
1Q2016 1Q2017 1Q2018
Capex (Rs bn) - LHS
Capex as a % of Revenue
0.0
5.0
10.0
15.0
34
44
54
64
1Q2016 1Q2017 1Q2018
DBN EBITDA Margin (%)
DTV EBITDA Margin (%) - RHS
390
420
450
0
200
400
600
1Q2015 3Q2016 1Q2018
DTV-Pre Paid ('000) - LHS
DTV-Post Paid ('000)
EQUITY REPORT TITLE | DateA CT HOLDINGS GROUP AND CLSA GROUP COMPANY 4A CT HOLDINGS GROUP AND CLSA GROUP COMPANY
Outlook & Valuations
DIAL’s NP forecasts for 2018E and 2019E are revised down by -3% and -5% to
Rs.12,054mn (+12% YoY) and to Rs.13,885mn (+15% YoY) on account of revised
finance costs
We revise up DIAL’s revenue growth forecast for 2018E to +11% YoY on account of
one off increase in international termination revenue during 1Q2018. We also revise up
DIAL’s revenue growth forecast for 2019E to +9% YoY owing to anticipated delay in
consumption pick up (that will likely happen in 2019E now) due to anticipated supply side
shocks in the near term given recent adverse weather related impact on the economy
DIAL’s EBITDA margin for 2018E is revised up to 37.5% (from 37.0% previously) due to
relatively high EBITDA levels reported in 1Q2018, owing to capitalization of customer
acquisition costs. However we anticipate EBITDA margins to come under pressure especially
in 2Q2018E on account of anticipated high content acquisition costs at DTV due to the LKR
depreciation witnessed thus far up to end May 2018. Whilst DIAL is expected to continue its
improving EBITDA margins in the medium term through its cost rescaling initiatives, we
revise up its EBITDA margins to 37.7% levels (37.5% previously) in 2019E
DIAL expects to reach a significant 4G coverage by December 2018E and we estimate
its capex intensity at ~25% for 2018E and 2019E (vs. 32.5%in 2017). DIAL continues to
however be faced with the risk of accelerated depreciation on account of high technological
obsolesce in the medium term
DIAL’s Net Finance Costs for 2018E and 2019E are revised up by +48% and +47%
to Rs.3,577mn (+52% YoY) and Rs.3,731mn (+4% YoY). Relatively high finance cost
revisions are attributed to revised LKR/US$ and LIBOR assumptions with total AEIRs
estimated at 8.6% each for 2018E (vs. 7.3%: 2017) and 2019E and LKR forecast at
Rs.162/US$ and Rs.169/US$ with average LIBOR anticipated at 2.45% and 2.55% for 2018E
and 2019E respectively
We anticipate DIAL’s digital bank on micro lending to contribute to its bottom-line from
2019E onwards, given the time needed to create business analytics and financial intelligence
in the near term. This initiative, however, if implemented correctly, would likely act as a
model for future fin-tech related applications in the country
We believe the recently proposed CTL will likely have a significant negative impact on the
investor sentiment if implemented, and thus expect CTL to be repealed / amended by
the Government in the near term
The share outperformed the market during the past year, rising +24% compared to
ASI’s -4% decline. During past 3 months DIAL share continued to outperform the
market by rising +7% compared to the market’s -2% decline
On revised earnings, DIAL trades at PERs of 9.8X for 2018E and 8.5X for 2019E, with
EV/EBITDA multiples of 3.8X for 2018E and 3.5X for 2019E and provide relatively
high ROEs of 19% - 21% in the short to medium term
We believe that the recent re-rating of the share is justified given DIAL’s recently improved
earnings fundamentals. A potential merger / acquisition between DIAL and Airtel (the
remaining acquirable candidate) could remain as a further catalyst to improve and
sustain the share price in the short to medium term
Dialog Axiata
NP revised down by -3% and -5% for 2018E and
2019E
EBITDA margins revised up owing to cost rescaling
initiatives
Finance costs revised up due to rising int’l interest
rates and revised LKR outlook
A potential merger with Airtel could re-rate DIAL
share in the medium term
Average ROEs of ~20% on offer
Implementation of Cellular Tower Levy
(CTL) unlikely
EQUITY REPORT TITLE | DateCT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 5CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
DIAL Forecast Financials
Dialog Axiata
DIAL: Coverage (PoP)
Source: DIAL
DIAL : 4G Devise vs. Smart Phone Penetration (Own base)
2017 % YoY 2018E^ % YoY^ 2018E % YoY 2019E^ % YoY^ 2019E % YoY
Revenue 94,196 8.6 103,616 10.0 104,558 11.0 112,941 8.0 113,968 9.0
Operating Expenses 60,345 4.9 65,278 8.2 65,348 8.3 70,588 8.0 71,002 8.7
EBITDA 33,851 15.9 38,338 13.3 39,209 15.8 42,353 8.0 42,966 9.6
Depreciation 19,109 16.7 21,464 12.3 21,487 12.4 23,004 7.1 23,070 7.4
Net Finance Costs 2,355 -0.3 2,410 2.3 3,577 51.9 2,538 -29.0 3,731 4.3
Net Profit 10,785 19.5 12,391 14.9 12,054 11.8 14,552 20.7 13,885 15.2
EBITDA Margin (%) 36.0 2.3 37.0 2.8 37.5 4.2 37.5 0.0 37.7 0.5
ARPU (Rs) 387 -2.3 393.3 1.6 394.4 1.9 402.6 2.1 402.6 2.1
Key Figures : Income Statement (Rs mn)
2016 2017 2018E 2019E
Net Debt to EBITDA (X) 0.9 0.8 0.8 0.8
Capex to Revenue (%) 26.7 32.5 25.0 25.0
Net Debt (Rs mn) 26,152 28,185 31,285 34,414
Free Cash Flow (Rs mn) 6,039 3,216.0 13,070 14,474
Capex (Rs mn) 23,173 30,635 26,139 28,492
Balance Sheet Ratios
^Previous forecast, CTL impact of ~Rs.5bn for 2018E and 2019E (w.e.f. 1 Apr 2018) is not factored into our forecasts
Mobile Operator (Rank) DIALOG (#1) MOBITEL (#2) HUTCH (#3) AIRTEL (#4) ETISALAT (#5)
31 March 2018 44.2% 28.0% 10.2% 9.2% 8.4%
30 September 2017 43.8% 27.8% 9.7% 8.7% 10.0%
31 March 2017 43.4% 27.7% 8.7% 8.5% 11.7%
Sri Lanka – Mobile Operator SIM Market Share Behaviour
0%
20%
40%
60%
80%
100%
1Q2017 2Q2017 3Q2017 4Q2017 1Q2018
2G 3G 4G (Mobile) 4G (Fixed)
0%
10%
20%
30%
40%
50%
60%
1Q2016 1Q2017 1Q2018
Dialog Axiata 4G devise penetration
Smart phone penetration (own base)
EQUITY REPORT TITLE | DateA CT HOLDINGS GROUP AND CLSA GROUP COMPANY 6A CT HOLDINGS GROUP AND CLSA GROUP COMPANY
Dialog Axiata
Major Shareholder Movements
Major Shareholder Movements as at 31 March 2018
No. Name No. of Shares %Change
(Shares)*Comment
1. Axiata Investments (Labuan) Ltd 6,785,252,765 83.3 -
2. Employees Provident Fund 180,787,158 2.2 - GoSL Related Party
3. Norges Bank Ac 2 134,714,879 1.7 -
4. SAGA Tree LLC 118,595,642 1.5 -
5. JPMCB Scottish ORL SML TR GTI 6018 83,426,021 1.0 -
6. Pershing LLC S/A Averbach Grauson and Co. 63,039,981 0.8 -
7. Saga Tree Asia Master Fund 60,862,436 0.8 -
8. CF Ruffer Inv Funds : CF Ruffer Pacific Fund 57,314,300 0.7 -
9. Vittoria Fund – ST, L.P. 54,512,186 0.7 -
10. Hosking Global Fund PLC 44,081,055 0.5
11. T Rowe Price Funds SICAV 39,445,307 0.5 -4,144,475
12. Alliance Bemstein Next 50 Emerging Markets (Master) Fund SICAV 38,024,290 0.5
-
13. Rubber Investment Trust LImited 36,668,830 0.5 -
14. International Finance Corporation 23,239,400 0.3 -8,804,000
15. J.B Cocoshell (Pvt.) Limited 19,401,262 0.2 +2,175,000
16. UPS Group Trust 18,880,000 0.2-
17. The Ceylon Investment PLC 18,797,647 0.2-
18.
HSBC International Nominees Limited - BBH -Prusik Asian Smaller Companies Fund Public Limited Company 18,200,000 0.2
-
19.HSBC International Nominees Limited - SSBT-Parametric Emerging Markets Fund 17,294,868 0.2
-
20.The Ceylon Guardian Investment Trust PLC A/C No. 02 16,470,454 0.2
-
Total 7,829,008,481
*Change since 28 February 2018
EQUITY REPORT TITLE | DateCT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 7CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange
CT CLSA SECURITIES (PVT) LTDA Member of the Colombo Stock Exchange
4-14 Majestic City, 10 Station Road, Colombo 4, Sri LankaGeneral: +94 11 255 2290 to 2294 Facsimile: +94 11 255 2289
Email: [email protected] Web: www.ctclsa.lk
A CT HOLDINGS GROUP AND CLSA GROUP COMPANY
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Dialog Axiata
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