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  • FC Research Analyst: Michelle Weerasinghe

    Earnings Update

    SRI LANKA

    P a g e | 1

    Recovery in core revenue streams and cost initiatives drive earnings

    Earnings up by 3%YoY: DIAL recorded earnings of LKR 2.35Bn for 2Q2017, up by of 3% as against LKR 2.29Bn recorded in 2Q2016 on the back of recovery in core revenue streams and cost rescaling initiatives. However, on a QoQ basis earnings grew by of 52% when compared to LKR 1.55Bn recorded in 1Q2017. During 1H2017 DIALs earnings amounted to LKR 4.9Bn down, by 22% from previous year. DIALs EBITDA was recorded at LKR 8.13Bn for 2Q2017 compared to LKR 7.1Bn the previous year growing by 15%YoY. Accordingly EBITDA margin improved to 35% from 34% in 2Q2016 and 33% in 1Q2017. Revenue for the quarter grew by 9%YoY and 4%QoQ to LKR 23.01Bn.

    Quarter performance impacted by externalities: DIALs earnings for the quarter was largely impacted owing to pressed consumer spending due to flood conditions during the month of May and increased consumption taxes on communication services which weakened revenue growth across its main businesses: Mobile, Fixed, Broadband and Pay Television. Total consumption taxes paid to the government of Sri Lanka by way of Telco Levy and VAT for 1H2017 was LKR 13.4Bn, up by 13%YoY. Total Direct taxes paid for 1H2017 was LKR 5.7Bn, down by 12%YoY. Dialog Mobile earnings driven by data revenue and subscriber growth: DIAL mobile earnings grew by 8%YoY and 35%QoQ to LKR 2.3Bn on the back of 12%QoQ growth in data revenue and subscriber growth. During 2Q2017 DIALs mobile subscriber base increased over 12.4Mn, with both postpaid and prepaid subscribers increasing by 1%QoQ respectively. The company EBITDA contribution to the group stood at 79% recording a LKR

    Sep 2017 Current Price LKR 11.9 Fair value LKR 14.1 2Q2017 Earnings 3%YoY

    DIALOG AXIATA PLC CSE: DIAL.N0000 Bloomberg: DIAL SL BUY

    Broadband broadens horizons

    Disclosure on Shareholding: First Capital Group and its affiliates does not hold shares of DIAL and will not trade in this share for the three trading days following the issue of this document.

    Price Volume Chart

    ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 6.

    LKR (Mn) 2Q2017 2Q2016 YoY 1Q2017 QoQ

    Revenue 23,012 21,065 9% 22,165 4%

    Gross Profit 10,897 10,020 9% 10,287 6%

    EBITDA 8,130 7,057 15% 7,221 13%

    PBT 2,734 2,690 2% 1,976 38%

    Net Profit (Equity) 2,346 2,287 3% 1,546 52%

    LKR (Mn) 3Q2016 4Q2016 1Q2017 2Q2017

    Revenue 21,748 22,775 22,165 23,012

    Gross Profit 10,600 10,397 10,287 10,897

    Gross Margin 49% 46% 46% 47%

    EBITDA 7,714 7,422 7,221 8,130

    EBITDA Margin 35% 33% 33% 35%

    PBT 3,189 1,629 1,976 2,734

    Net Profit (Equity) 2,833 1,251 1,546 2,346

    Net Margin 13% 5% 7% 10%Source: CSE

    KEY DATA

    Share Price (LKR)

    Average Daily Volume (Shares)

    Average Daily Turnover (LKR)

    8,143.8

    Price Performance (%) 1 mth 3 mths 12mths

    DIAL 1% -3% 1%

    ASPI -2% -4% -2%

    83.32%

    2.22%

    1.27%

    1.02%

    0.79%

    16.68%

    19,094,894

    11.90

    52w High/Low (LKR) 12.20 / 10.10

    1,677,446

    CB NY S/A International Finance Corporation

    Issued Share Capital (Shares mn)

    Market Capitalisation (LKR mn) 96,911

    Major Shareholders as at 31st Jun 2017

    Axiata Investments (Labuan) Limited

    Employees Provident Fund

    CITI Bank New York S/A Norges Bank A/C 2

    HSBC Int'l Nominees Ltd - JPMCB

    Estimated Free Float

    P/E 31 December 2015 2016 2017E 2018E 2019E

    Revenue (LKR mn) 73,930 86,745 94,016 101,554 109,510

    YoY % Growth 10% 17% 8% 8% 8%

    Net Profit (LKR mn) 5,188 9,041 9,817 11,579 13,237

    EPS (LKR) 0.64 1.11 1.21 1.42 1.63

    YoY % Growth -15% 74% 9% 18% 14%

    Valuations

    PER (x) 18.7 10.7 9.9 8.4 7.3

    PBV (x) 2.0 1.8 1.6 1.4 1.2

    Div Yield (%) 2.7% 3.3% 3.8% 4.4% 5.1%

    NAVPS 5.8 6.6 7.5 8.4 9.5

    DPS (LKR) 0.3 0.4 0.4 0.5 0.6

    Div Payout 50% 35% 37% 37% 37%

  • FC Research Analyst: Michelle Weerasinghe

    Earnings Update

    SRI LANKA

    P a g e | 2

    6.5Bn, up by 9%YoY and 13%QoQ. EBITDA Margin for the Mobile business was recorded to be 33.9% for the quarter.

    DTV subscriber base records strong growth: DTV subscribers increased by 22%YoY and 5%QoQ to 911,000 during 2Q2017. During the quarter DTVs EBITDA improved by 70%QoQ to LKR 110Mn, recording an EBITDA Margin of 7.2%. DTV revenue improved by 1%QoQ led by a growth of 10%QoQ prepaid subscribers while DTVs net loss was reduced by 30%QoQ. DBN Turns around: DIALs broadband business continued to record profits for the second consecutive quarter growing by 40%QoQ to LKR 331Mn. DBNs EBITDA was recorded at LKR 1.7Bn growing by 10%QoQ recording an EBITDA margin of 54.5% on the back of 34%YoY growth in revenue mainly arising from Home Broadband segment. 1H2017 earnings impacted by depreciation, finance cost and translational forex losses: Capex for 1H2017 was recorded at LKR 11.9Bn compared to LKR 7.1Bn in the previous year. Capex was mainly directed at high-speed broadband infrastructure consisting of capacity upgrades and LTE focused coverage expansion. Further, the total depreciation, amortization and impairment was recorded to be LKR 9.2Bn for 1H2017 compared to 7.5Bn in the previous year. Net finance cost for the six months was recorded at LKR 1.6Bn while for 2Q2016 it was recorded at LKR 725Mn.

    Investment Case

    DIAL to provide an annualized return of c.17.6%: FC Research estimates fair value for DIAL at LKR 14.1 over a period of 15 months. [DCF based LKR 14.0 and PER based LKR 14.2]. DIAL is expected to provide a total return of c.22.5% for 2018E including a Dividend Yield of c.4%. DIALs mobile and fixed broadband to drive growth: FC Research expects Sri Lankas total mobile broadband subscribers to grow at a CAGR of c.8% through 2016-2019E and fixed broadband subscribers to grow at a CAGR of c.13% through 2015-2019E resulting in overall mobile and fixed broadband penetration to reach 24% and 5% by 2019E respectively. Sri Lankas mobile broadband penetration has grown from 4.5% in 2012 to 16.2% in 2015 at a CAGR of c.53% while fixed broadband penetration has grown from 2.05% in 2013 to 2.99% in 2015 at a CAGR of c.21%. DIAL introducing 4.5G and the ground-breaking 5G technology capability trial: DBN in June 2017 commercially launched 4.5G TDD LTE network with Home Broadband services technology while in August the ground-breaking 5G technology capability trial was carried out. DIAL was also the first telco to commence commercial operations of mobile 4G-LTE services in 2013. DIAL enters financial sector: DIAL bought 80% stake of 37.5Mn shares in Colombo Trust Finance PLC in September 2017 at LKR 28.7 per share. DIALs investment was aimed at accelerating the drive towards adoption of digital financial services by encouraging digital savings and increase access to financial services.

    Investment risks

    Operational Risks: DIALs traditional revenue streams such as voice and messaging may be disrupted continually with ever increasing Over The Top (OTT) players such as Viber, Whatsapp, etc. Exchange rate risk: DIALs USD denominated balances will result in a net foreign exchange difference with the fluctuation of LKR against USD. As a result of the adverse movement in the local currency DIALs, borrowing mix shifted to 69:31 by end 2016 from 100% USD denominated borrowing as at end 2015. Interest rate risk: DIALs cash and bank balances including deposits placed with banks and borrowings from financial and non-financial institutions will be impacted with yield curve trend and interest rate movements. Currently DIALs interest expense is charged at both fixed and floating rates on both local and foreign borrowings. Regulatory Risk: DIALs operations are subject to direct income tax, fees and levies as well as consumption taxes in the form of Telco Levy and VAT. Currently DIAL pays corporate taxes at 28% while DBN and DTV are taxed at 15% and 20% respectively. The introduction of VAT and NBT in 2016 resulted in aggregate consumption taxes increasing from 27.6% to 49.7% for voice services and from 12.2% to 31.7% for data services. In August 2017 DIAL and other telecommunications operators decided to grant a 10% bonus usage on internet packages/card as a special gesture to mark the removal of telecom levy by the Government.

  • FC Research Analyst: Michelle Weerasinghe

    Earnings Update

    SRI LANKA

    P a g e | 3

    Valuation Summary DCF Valuation PER Valuation

    Scenario Analysis

    Categorization Company Category Strong Buy Buy Hold Sell

    Grade A S&P SL20 CompaniesT.Bill + 10%

    & Above

    T.Bill + 5% &

    Above

    T.Bill + 1% &

    Above

    Below T.Bill

    + 1%

    Grade B Rest of the CompaniesT.Bill + 13%

    & Above

    T.Bill + 8% &

    Above

    T.Bill + 3% &

    Above

    Below T.Bill

    + 3%

    Grade CCompanies less than

    LKR 1Bn Market Cap

    T.Bill + 16%

    & Above

    T.