Dialog Etisalat Deal 2014

Dialog Axiata - ADD
Broadband broadens growth prospects

CMP (LKR) 9.10
12-mth TP (LKR) 10.30(13%)
Market cap (US$ m)
589.8
Bloomberg DIAL:SL
Sector Telecommunications

Shareholding pattern (%) - as at 31 Dec 12
Promoters 83.3
FII 6.5
DII 6.9
Others 3.3

52Wk High/Low (LKR) 9.5/5.4 8.72/7.05
Shares o/s (m) 8,143 1,071.2
Daily volume (US$ m) 0.07 17.1
Free float (%) 17 100.0

Price performance (%)
1M 3M 1Y
DIAL 1.1 8.3 31.9
Rel. to CSEALL -0.4 7.9 23.6

Stock performance

0
5
10
15
0
20,000
40,000
60,000
80,000
O
c
t
-
0
8
A
p
r
-
0
9
O
c
t
-
0
9
A
p
r
-
1
0
O
c
t
-
1
0
A
p
r
-
1
1
O
c
t
-
1
1
A
p
r
-
1
2
O
c
t
-
1
2
(LKR) Shares
('000)
Volume(LHS)
Price(RHS)
Company update

Initiating Coverage
10 April 2013
Institutional Equities
Abdul Hafeel | abdul.hafeel@iiflcap.com
+94 112 147121
Dialog Axiata (DIAL) is a quad-play telecom company with a
subscriber base of ~7m (~40% market share). Its closest
competitor is Sri Lanka Telecom (SLT), the former state-owned
telecom monopoly, which is another quad play. Bulk of DIALs
revenue (~90%) comes from the mobile and fixed telephony
segments. In the mobile segment, DIAL faces stiff competition
from SLTs subsidiary, Mobitel and three other operators. DIALs
ascension into quad-play status began with its acquisition of
CBN-SAT, which it subsequently re-branded as Dialog TV. Its
appetite for acquisition led growth continued in 2012 when it
bought a fixed line operator and took a 26% stake in an e-
commerce business. DIAL had won the 4G spectrum auction held
in end-March 2013 and has gradually begun commercially rolling
out its mobile 4G service. DIAL also provides fixed 4G broadband
services. We expect broadband to be a key growth driver going
forward. We initiate coverage with ADD and a 12-month target
price of LKR 10.30.

Growth opportunity in broadband segment: With mobile subscriber
penetration at ~100%, broadband is logically the next big growth area
for Sri Lankan telcos. Broadband penetration in Sri Lanka is still low (~6-
7%). This, coupled with the governments initiative to drive broadband
adoption should augur well for broadband growth.

Stable industry outlook should prop up voice segment: The
absence of new entrants and imposition of a price floor (on voice calls)
by the Telecom regulator should help stabilise the mobile voice market.
This should help DIAL broadly retain its market share and leverage its
superior branding to compete for services such as IDD and mobile data
packages and deliver stable growth in its core mobile segment.

Initiate coverage with ADD: DIALs shares are trading at EV/Ebitda of
5.1x FY13ii and 4.9x FY14ii. The expected growth in broadband adoption
forms a key part of our investment thesis. Our DCF-based 12-month
target price is LKR10.30 (WACC 18%, g-3%) yielding a ~13% upside to
the current share price. ADD
Financial Summary (LKR m)
YE 31 Dec (LKR mn) CY11 CY12 CY13ii CY14ii CY15ii CY16ii
Revenue (LKR m) 45,637 56,345 64,804 70,422 74,853 77,397
YoY (%) 10.2 23.5 15.0 8.7 6.3 3.4
Ebitda (LKR m) 16,523 18,357 19,424 20,482 22,085 22,287
Ebitda margin (%) 36.2 32.6 30.0 29.1 29.5 28.8
EBIT (LKR m) 6,218 6,801 6,934 7,598 9,427 11,066
EBIT margin (%) 13.6 12.1 10.7 10.8 12.6 14.3
EPS (LKR) 0.7 0.7 0.4 0.5 0.8 1.0
PER (x) 13.8 12.3 20.9 16.9 11.7 9.1
PBV (x) 2.2 2.0 1.9 1.8 1.6 1.4
EV/Ebitda (x) 6.0 5.4 5.1 4.9 4.5 4.5
ROE (%) 16.3 16.9 9.4 11.1 14.7 17.3
Source: Company, IIFL Research. Prices as of close of business on 09 April 2013

www.randora.lk
Subscribe our Dialog SMS,Just type - REG <space> randora & send to 77100

abdul .hafeel @i i fl cap.com
Dialog Axiata - ADD
2
Company snapshot

Dialog Axiata is a quad-play telecom company with over 7m subscribers
(~40% market share). Its closest competitor is SLT, the former state
owned telecom monopoly, which is another quad play. Bulk of DIALs
revenue (~90%) is from the mobile and fixed telephony segments. In
the mobile segment, DIAL faces stiff competition from SLTs subsidiary,
Mobitel and the Sri Lankan subsidiaries of UAEs Etisalat ,Indias Bharti
Airtel and Hutchison Whampoa. DIAL has actively acquired and invested
into the ICT value chain. DIALs ascension into quad play status began
with its acquisition of CBN-SAT, which it subsequently re-branded as
Dialog TV.

DIAL acquired Suntel Limited, a Wireless Local Loop (WLL) operator in
March 2012 for ~USD34m, with the stated aim of strengthening its
corporate solutions services. Suntel was formally amalgamated into
DIALs subsidiary, Dialog Broadband Networks (DBN) in May 2012. The
Suntel acquisition, added ~350,000 new (~50,000 corporate) accounts
to DBN.

DIAL has continued to strengthen its broadband business by acquiring a
4G license (1800 MHz bandwidth) at a cost of LKR3.2bn, outbidding the
next closest bidder by ~2b. With this DIAL became the first South Asian
Telco operator to launch mobile 4G services. We expect broadband to
be a key value driver for DIAL in the medium term. Though initial
launch is confined to the Capital city, Colombo, we expect DIAL to roll
out 4G country wide over next 2-3 years, especially given that 4G could
be implemented on top of the existing 3.5G infrastructure.

Key Management
Name Position Background
Mr. Datuk Azzat
Kamaludin
Chairman Was appointed to the board of Dialog Telekom as
chairman and director in 2008. He is also an
independent non-executive director of Dialog's
parent, Axiata, Malaysia
Dr Hansa Wijesuriya CEO/
Director
Joined the company in 1994, and has been CEO of
Dialog Telekom since 1997
Source: Company, IIFL Research
DIAL has also been expanding its e-commerce business with the
acquisition of a ~26% stake in a web based trade portal, anything.lk.
It has also introduced a mobile phone based cash settlement system
called Ez Cash and is planning on introducing an FX inward remittance
platform

Figure 1: DIALs segment revenue breakdown

Source: Company Data, IIFL Research

Figure 2: Estimated market share in the wireless market

Source: BMI, IIFL Research
Mobile
operations
62%
International
operations
23%
Infrastructure
3%
Fixed line
7%
Pay TV
5%
Dialog
40%
Mobitel
25%
Etisalat
19%
Airtel
9%
Hutch
7%
www.randora.lk

Dialog Axiata - ADD
3
Broadband stands to be the new growth driver
With mobile subscriber penetration at ~100%, broadband is logically
the next big growth area for Sri Lankan telcos. Broadband subscription
(both fixed and mobile) is ~6-7% of Sri Lankas population and this
coupled with the Sri Lankan governments ICT drive and relatively swift
technology adoption by Sri Lankan ICT users should augur well for
broadband service providers.

Figure 3: Broadband operators in Sri Lanka and Technologies used
Operator Technology Mode Mobile/Fixed
SLT ADSL, ADSL2, ADSL2+ Wired Fixed
Lanka Bell CDMA2000/ WiMAX Wireless Fixed
Dialog Broadband (DBN) CDMA2000/ WiMAX/LTE Wireless Fixed
Dialog mobile GSM/W-CDMA/LTE Wireless Mobile
Mobitel GSM/W-CDMA Wireless Mobile
Etisalat GSM/W-CDMA Wireless Mobile
Airtel GSM/W-CDMA Wireless Mobile
Sky Networks WiMAX Wireless Fixed
Hutchison GSM/W-CDMA Wireless Mobile
Source: TRCSL, IIFL Research

The Sri Lankan government has identified broadband as a driver for
economic growth, especially in positioning Sri Lanka as a knowledge
hub. Moreover supporting broadband infrastructure also boosts the local
ICT industry as well the governments own e-government initiative. To
this effect, the industry regulator (TRCSL) has drawn up a new national
broadband policy.

Currently approximately only ~10% of the ~20.3m mobile phones
available in Sri Lanka are 3G enabled. In a bid to jump start mobile
broadband adoption, DIAL has begun distributing a series of 3.5G
compatible mid-range Android smart phones. Currently ~10,000 of
these units have been sold. We expect mobile data, which currently
accounts for ~5-8% of DIALs mobile segment ARPU to increase to ~10-
15% over the next 2-3 years.

Though DIAL is the first Sri Lankan telco to launch 4G commercially, we
dont expect DIAL to roll out mobile 4G country wide just yet. Currently
only the metropolitan region of the capital, Colombo is covered by
mobile 4G. Its too early to comment on 4G roll out costs. Amongst
other factors, key to a successful 4G roll out would be ready availability
of 4G devices, quality of service and network upgrades. We expect DIAL
to ramp up 4G coverage in the latter part of 2013, especially given
limited availability of 4G compatible devices at present. Nevertheless
new competition entering the 4G market, may fast track this approach.

DIAL also has a fixed 4G broadband service using TDD-LTE technology
which it introduced in December 2012 through its subsidiary DBN as
replacement for WiMAX. We expect DIALs fixed line broadband service
(both 4G and CDMA) to benefit from increased demand for broadband
services from corporate and households without copper wire
connections which restricts their ability to obtain wire-line based ADSL
connections. We expect demand from the retail and leisure sector for
fixed broadband services. Households seeking secondary broadband
connections too are most likely to choose wireless broadband.

Figure 4: Growth potential exists despite rapid growth in broadband subscribers


Broadband subscription costs have declined over the past five years as
competition intensified, in line with the trend seen globally. We expect
reduction in prices, coupled with availability of affordable smart phones,
to speed up broadband adoption over the next 2-3 years.
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
2009 2010 2011 2012
Mobi l e Broadband Internet Subscri bers
Fi xed Broadband Internet Subscri bers
www.randora.lk

Dialog Axiata - ADD
4
Figure 5: Broadband rates have declined over last five years across all operators
Year Operator SLT Lanka Bell DBN Dialog Mobitel
Volume Unlimited Unlimited Unlimited Unlimited 5 GB
2008 Downlink Speed 512 kbps 1 Mbps 1 Mbps na 3.6 Mbps
Tariff/Month(Rs.) 2,250 3,000 3,000 4,500 5,000

Volume Unlimited Unlimited Unlimited 4 GB 5 GB
2010 Downlink Speed 512 kbps 512 kbps 1 Mbps na 3.6 Mbps
Tariff/Month(Rs.) 1,600 2,000 1,750 990 5,000

Volume 20 GB 10 GB 15 GB 5 GB 5 GB
2012 Downlink Speed 2 Mbps 1 Mbps 1 Mbps 1 Mbps 1 Mbps
Tariff/Month(Rs.) 1,490 500 2,000 990 890
Source: TRCSL, ITU, IIFL Research

Stable industry outlook should prop up voice segment: With no
new telecom operators entering the already-crowded telco space and
the Telecom regulator enforcing a price floor on outgoing voice calls, the
mobile voice market should see stable growth. This should help DIAL
broadly retain its market share and leverage its superior branding to
compete for services such as IDD and mobile data packages and deliver
stable growth in its core mobile segment.

Support from Malaysian parent is a crucial value driver
With over 80% of DIAL controlled by Malaysias Axiata Group Bhd, DIAL
should be able to count on continued support from its Malaysian parent
company for operational and strategic support. The parent has
supported DIAL in the past through measures such as corporate
guarantees of DIALs debt and equity injection. We expect this
arrangement to continue in future.

Mobile and e-commerce ventures fit into overall strategy
With a bid to strengthen its e-commerce business, DIAL recently
acquired a 26% stake in Digital Commerce Lanka (Pvt) Ltd (DCL), which
operates an e-commerce portal anything.lk. DIAL has also introduced
a mobile cash payment service Ez Cash which facilitates money
transfers through DIALs network to registered users of the Ez Cash
system. It is also planning on introducing inward money transfer
facilities, aimed especially at the ~2m Sri Lankans migrant workers. We
expect such initiatives coupled with increased broadband penetration
and increased adoption of smart phones to drive DIALs mobile money
and e-ecommerce business.

Figure 6: Price floors have assisted in restoring short term industry profitability

Source: TRCSL, ITU, IIFL Research

Benefits from Suntel acquisition are a mixed bag
DIALs rationale for the Suntel acquisition was to bolster its corporate
solutions business. Nevertheless, it still isnt clear if this acquisition has
achieved its objectives of expanding DIALs corporate broadband
clientele, despite contributing to EBITDA in CY2012. Nevertheless,
limited availability of copper wire lines and Fibre-To-The-Building (FTTB)
should see DIALs fixed wireless broadband business grow over the
short to medium term, especially in the corporate segment.

-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
2007 2008 2009 2010 2011
0
0.5
1
1.5
2
2.5
Industry profi t/(l oss) (LHS) Fl oor rate - On Net (RHS)
Fl oor rate - Off Net (RHS)
(LKR m) (Rs)
www.randora.lk

Dialog Axiata - ADD
5
Outlook and Valuation
In the short-to-medium term, we expect DIALs bottom line to benefit
from increased broadband adoption, driven by a governmental initiative
to promote e-governance and knowledge hub vision, and consumer-
driven demand for more broadband. Low penetration of wire (copper
and optical) line as well as limited availability of FTTH (Fibre To The
Home) and FTTB should help drive wireless broadband adoption. We
expect DIALs Ebitda margins to hover at ~30% over the CY13-15ii
period. Nevertheless, a slowdown in the economy, price wars on
broadband offerings and a general slack in broadband pick up by
consumers are significant risks to our forecast. Our DCF-based valuation
yields a 12-month target price of LKR10.30, with a ~13% upside. We
initiate coverage with ADD.

www.randora.lk

Dialog Axiata - ADD
6
Annexure Sri Lankan Telco industry

The Sri Lankan Telecommunications industry was initially a state run
monopoly, which saw significant and rapid liberalisation in the mid
1990s. The state run Department of Telecommunications was
converted to a state owned corporation, Sri Lanka Telecom Corporation
in 1991. In 1996, this entity was converted to a fully state owned
company, SLT. SLTs monopoly over fixed line telephony ended in 1996
with the issue of Wireless Local Loop (WLL) licences to two new
operators, Lanka Bell and Suntel (now amalgamated with DIAL). In
2003, SLTs monopoly over international telephony ended with the
issuance of External Gateway Operator (EGO) licences. The industry
regulatory body, the Telecommunications Regulatory Commission of Sri
Lanka (TRCSL) was formed in 1996.

Currently there are three fixed-line and five mobile operators in Sri
Lanka. There are also six Data Communication providers, nine
Data/Internet service providers, and 33 External Gateway Operators.
Principal international connectivity is through the South-East Asia
Middle East Western Europe (SEA-ME-WE) and the Fiber-Optic Link
Around the Globe (FLAG) submarine cables. Sri Lanka also has
connectivity has through two regional submarine cables, Bharat Lanka
and Dhiraagu.

The Sri Lankan Telecom market has seen several innovations within a
short span. For instance, 3G was introduced on a test phase in 2003 in
Sri Lanka and was operational commercially in 2006. Additionally high-
speed 3.5G HSPA systems were deployed on top of the existing 3G
infrastructure.

With DIAL launching its mobile 4G service in April 2013, Sri Lanka
became the first South Asian country to have a commercially
operational mobile 4G network. Nevertheless, 4G was launched on a
test phase in 2011. The setting up of a fibre-optic National Backbone
Network (NBN) should further help increase broadband penetration and
reduce prices going forward. Currently fibre is used mainly for
transporting backhaul traffic. The NBN is being implemented by SLT
under TRCSL auspices, and can be shared by all operators.
The Sri Lankan Telecom sector is characterised by intense competition.
With the imposition of a price floor on voice by the TRCSL, players are
now competing on service quality and differentiated product offerings
(e.g. data speed, handsets etc.). With the Sri Lankan telecom market
reaching saturation, it is conceivable that industry consolidation may
occur as the loss-making operators contemplate exiting the sector.

Figure 7: Fixed Telephone Subscribers Growth has plateaued


Figure 8: Mobile Subscribers Growth has been exponential

-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
www.randora.lk

Dialog Axiata - ADD
7
Figure 9: Broadband penetration - regional rankings
Country Broadband Penetration 2012* (%) Regional Rank 2011
Singapore 189.5 1
Taiwan 106.6 2
Australia 53.9 3
South Korea 38 4
Hong Kong 32.8 5
Japan 31.9 6
Malaysia 22.3 7
China 14.3 8
Sri Lanka 8.4 9
Philippines 7.4 10
Thailand 6.3 11
Vietnam 5 12
Pakistan 1.6 13
India 1.2 13
Indonesia 0.9 15
Cambodia 0.5 16
Laos 0.5 16
Bangladesh 0.3 18
* forecast for 2012

Figure 10: Mobile penetration regional rankings
Country Mobile Penetration 2012* (%) Regional Rank - 2011
Hong Kong 222 1
Singapore 154.9 2
Vietnam 136.3 3
Australia 135 4
Malaysia 132 5
Cambodia 130 6
Indonesia 129.2 7
Taiwan 128.4 8
Thailand 118.9 9
South Korea 112.9 10
Laos 109.3 11
Japan 108.4 12
Philippines 103.5 13
Sri Lanka 92.8 14
China 80.7 15
India 78.1 16
Bangladesh 72.7 17
Pakistan 62.7 18
* forecast for 2012

www.randora.lk

Dialog Axiata - ADD
8

Financial summary

Income statement summary (LKR m)
Y/e 31 Dec CY11 CY12 CY13ii CY14ii CY15ii
Revenue 45,637 56,345 64,804 70,422 74,853
YoY (%) 10.2 23.5 15.0 8.7 6.3
Gross Profit 20,523 24,129 32,402 35,211 37,427
GP margin (%) 45.0 42.8 50.0 50.0 50.0
EBITDA 16,523 18,357 19,424 20,482 22,085
EBITDA margin (%) 36.2 32.6 30.0 29.1 29.5
EBIT 6,218 6,801 6,934 7,598 9,427
EBIT margin (%) 13.6 12.1 10.7 10.8 12.6
Profit Before Tax 5,932 4,066 4,332 5,219 7,272
Net Profit - reported 5,354 6,030 3,546 4,373 6,360
YoY (%) 6.1 12.6 (41.2) 23.3 45.4
Net Profit - recurring 6,105 4,016 3,546 4,373 6,360
YoY (%) 11.6 (34.2) (11.7) 23.3 45.4
EPS - reported 0.7 0.7 0.4 0.5 0.8

Cash flow summary (LKR m)
Depreciation, Amortisation 10,305 11,556 12,490 12,885 12,659
Other operating cash flow 1,616 5,961 (1,303) 130 (3,965)
Cash From Operating Activities 17,853 21,583 15,519 18,234 15,966
Cash From Investing Activities (8,651) (20,864) (16,238) (14,084) (11,228)
Cash from Financing Activities (4,309) (2,409) (4,720) (3,452) (3,782)
Net Changes in Cash 4,894 (1,691) (5,439) 698 956
Free Cash Flow 9,134 4,174 (718) 4,150 4,738
Free Cash Flow per share 1.1 0.5 (0.1) 0.5 0.6
Cash Flow per Share 0.6 (0.2) (0.7) 0.1 0.1

Balance sheet summary (LKR m)
Property, plant and equipment 51,101 59,064 59,780 61,308 60,205
Other non-current assets 3,937 10,664 13,695 13,367 13,039
Inventories 436 284 169 367 388
Receivables and prepayments 10,275 12,022 13,510 14,685 15,538
Cash and Cash Equivalents 10,452 8,647 3,208 3,906 4,862
Total Assets 76,201 90,680 90,362 93,633 94,032
Borrowings 24,800 24,927 22,894 20,861 18,828
Payables 13,268 26,164 27,019 29,369 27,191
Other liabilities 4,165 2,408 2,408 2,408 2,408
Total Liabilities 42,232 53,499 52,321 52,638 48,427
Shareholders' Equity 33,969 37,182 38,040 40,994 45,605
Book value per share 4.2 4.6 4.7 5.0 5.6

Segment Ebitda margin (%)
Mobile operations EBITDA 15,278 15,934 16,988 18,080 19,798
Margin (%) 36.6 32.0 29.5 28.8 29.7
Fixed broadband EBITDA (943) 1,778 1,598 1,385 1,211
Margin (%) na 35.3 29.8 25.1 21.0
Pay TV EBITDA 574 646 839 1,019 1,078
Margin (%) 24.0 21.6 23.7 25.6 24.8

www.randora.lk

(

DIAL - ADD

LTE - the next growth driver, albeit slowly
Financial Summary
Y/e 31 Dec/(LKR m) CY11 CY12 CY13 CY14ii CY15ii
Revenue (LKR m) 45,637 56,345 63,298 71,534 76,105
YoY (%) 10.2 23.5 12.3 13.0 6.4
Ebitda (LKR m) 16,523 18,357 20,004 24,761 26,652
Ebitda margin (%) 36.2 32.6 31.6 34.6 35.0
Ebit (LKR m) 6,218 6,801 7,664 10,208 12,631
Ebit margin (%) 13.6 12.1 12.1 14.3 16.6
Net Profit (LKR m) 5,354 6,030 5,201 7,938 10,499
EPS (LKR) 0.7 0.7 0.6 1.0 1.3
PER (x) 13.7 12.2 14.1 9.2 7.0
PBV (x) 2.2 2.0 1.8 1.6 1.4
EV/EBITDA (x) 6.0 5.4 5.0 4.0 3.7
ROE (%) 16.3 17.0 13.5 18.7 21.5
Source: Company, IIFL Research.
Abdul Hafeel | abdul.hafeel@iiflcap.com
+94 112 147121
CMP LKR9.0
12-mth TP (LKR) 9.8 (16.7%)
Market cap (USD m) 566.6
Bloomberg DIAL SL
Sector Telecommunications

Shareholding pattern (%) as at 30 Sep 13
Promoters 83 16.0
FII 7 10.3
DII 7 8.0
Others 3 65.7

52Wk High/Low (LKR) 9.9/8.0
Shares o/s (m) 8,144
Daily volume (US$ m) 0.1
Free float (%) 17.0

Price performance (%)
1M 3M 1Y
DIAL (1.1) 1.1 1.1
Rel. to ASP Index 4.0 (1.3) (3.7)

Stock performance

0
5
10
15
0
50,000
100,000
M
a
r
-
0
9
S
e
p
-
0
9
A
p
r
-
1
0
O
c
t
-
1
0
M
a
y
-
1
1
N
o
v
-
1
1
J
u
n
-
1
2
J
a
n
-
1
3
J
u
l
-
1
3
F
e
b
-
1
4
(LKR) Shares
('000)
Volume(LHS)
Price(RHS)
Result update

4QCY13 result
review
13 March 2014


Dialog Axiata (DIAL) reported 4QCY13 headline net profit of
LKR755m, up ~26% YoY. Group revenue was up ~8.8% YoY to
LKR16.3b. Mobile revenue, which accounts for ~85-90% of group
revenue, increased ~8.4% YoY to LKR14.2b, driven by ~11.4% YoY
subscriber growth. ARPUs growth was marginal (~0.3% YoY).
Fixed broadband revenue was flat in 4QCY13 largely due to the
increased CDMA customer churn. Media revenue was up ~22.7%
YoY and subscriber base increased ~25.8% YoY. Group Ebidta
margin contracted ~1ppts YoY to ~33%, largely due to margin
erosion in the mobile segment due increase in bad debt provision
(resulting from streamlining of billing system) and network
operating costs. Reported PAT for 4QCY13 was down ~19.8% YoY
to LKR1,122.7m. DIAL continues to invest in expanding broadband
capabilities and investments in spectrum acquisition and backhaul
traffic to secure its market share. We retain our 12-month target
price is LKR9.80, largely owing to slower-than-expected LTE
uptake. ADD.

LTE roll out in progress; not yet earnings accretive: LTE adoption
remains subdued despite the recent introduction of fixed and mobile LTE
services. Among fixed broadband technologies, ADSL remains the most
widely used one. Fixed LTE is currently offered mainly in urban centres;
currently DIAL has ~8,000 LTE subscribers. Rollout of mobile LTE, which
was introduced in 2QCY13 is still subdued, with availability confined to
major urban areas. This, coupled with Sri Lanka having some of the lowest
broadband charges in the region, should push back broadband contribution
to bottom line to beyond 2014-15ii.

Continued investment in capacity augurs well for growth: DIAL
continues to invest in expanding broadband capabilities with significant
investments in spectrum acquisition and backhaul traffic. DIAL is investing
~USD30m in a submarine cable project that would enable it to handle
more backhaul traffic.

Valuation: We retain our 12-month target price to LKR9.80 largely due
to slower than expected uptake in LTE. Nevertheless, we expect
investment in LTE to generate returns over the medium term. ADD

www.randora.lk

abdul.hafeel@iiflcap.com

Dialog Axiata ADD

2
Figure 1: Given a population of ~20m, broadband has plenty of growth potential


Figure 2: ARPU and net subscriber additions (YoY) have gradually increased


Figure 3: Mobile segment RPM has increased due to broadband usage


Figure 4: CDMA & Broadband customer base has consolidated in CY13 after experiencing
churn following the Suntel acquisition in 2Q 2012

0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013
Mobile Broadband Internet Subscribers
Fixed Broadband Internet Subscribers
0
100
200
300
400
500
600
700
800
900
1,000
270
280
290
300
310
320
330
340
350
360
370
1
Q
2
0
1
1
2
Q
2
0
1
1
3
Q
2
0
1
1
4
Q
2
0
1
1
1
Q
2
0
1
2
2
Q
2
0
1
2
3
Q
2
0
1
2
4
Q
2
0
1
2
1
Q
2
0
1
3
2
Q
2
0
1
3
3
Q
2
0
1
3
4
Q
2
0
1
3
Net subscriber addition (000's)
Average Revenue Per User (LKR)
1.80
1.90
2.00
2.10
2.20
2.30
2.40
140
145
150
155
160
165
170
175
180
1
Q
2
0
1
1
2
Q
2
0
1
1
3
Q
2
0
1
1
4
Q
2
0
1
1
1
Q
2
0
1
2
2
Q
2
0
1
2
3
Q
2
0
1
2
4
Q
2
0
1
2
1
Q
2
0
1
3
2
Q
2
0
1
3
3
Q
2
0
1
3
4
Q
2
0
1
3
Revenue per minute
Minutes of Usage
0
100
200
300
400
500
600
1
Q
2
0
1
1
2
Q
2
0
1
1
3
Q
2
0
1
1
4
Q
2
0
1
1
1
Q
2
0
1
2
2
Q
2
0
1
2
3
Q
2
0
1
2
4
Q
2
0
1
2
1
Q
2
0
1
3
*
2
Q
2
0
1
3
*
3
Q
2
0
1
3
*
4
Q
2
0
1
3
*
Broadband (CDMA post Suntel Acquisition*)customer base (000's)
www.randora.lk


Dialog Axiata ADD

3
LTE rollout is gradual; Governments broadband initiative should
be a major driver of LTE adoption over the medium term
Adoption of LTE broadband has been slow largely due to gradual roll-out
of service and limited availability of LTE compatible handsets. At
present, both fixed and mobile LTE is available only in major urban
centres. According to the industry regulator, ADSL (which is a wire-
based broadband service offered mainly by Sri Lanka Telecom (SLT), is
the most commonly used among fixed broadband services, followed by
WiMax and LTE. Nevertheless, given the Sri Lankan governments
broadband initiative and higher costs involved in rolling out wire-based
broadband networks, we expect LTE adoption to improve gradually over
the medium term. We expect DIAL and Mobitel (a unit of SLT) to be
major players in the LTE space.

Continued investment in capacity to accrue benefits
DIAL has continued to invest into expanding its broadband capabilities,
with significant investments in spectrum acquisition and backhaul
traffic. DIAL is investing ~USD30m in a submarine cable project, the
Bay of Bengal Gateway (BBG), which is expected to be completed by
end-2014. This should enable DIAL to improve its backhaul traffic as
BBG connects to high capacity Internet hubs in India and Singapore.
DIAL has also been keen in acquiring more bandwidth to expand its
fixed LTE offering. DIAL has acquired Sky Television and Radio
Networks for LKR800m, giving it access to the latters 2.3Ghz spectrum
band, which should enable DIAL to expand its fixed LTE service.

Mobile money and e-commerce should see growth
DIALs EzCash mobile money platform has potential to grow, especially
with saturation in mobile penetration and costs associated with rollout
of point of sales and ATM networks countrywide. The continued
prevalence of the informal financial sector (e.g. private individuals
engaged in money lending, transfer etc.) is also a potential driver for
mobile money demand. This coupled with DIALs plan to enable
remittance facilities for the ~2m Sri Lanka expatriate workers should
see increased adoption of its EzCash platform. Mobile commerce too
should see increased usage as broadband speeds and wider use of
credit and debit cards are adopted. DIALs trade portal, anything.lk
ranks 84 out of 500 most visited sites in Sri Lanka by Alexa.com.

Support from Malaysian parent is a crucial value driver
With more than 80% of DIAL controlled by Malaysias Axiata Group Bhd,
DIAL should be able to count on continued support from its Malaysian
parent company for operational and strategic support. The parent has
supported DIAL in the past through measures such as corporate
guarantees of DIALs debt and equity injection. We expect this
arrangement to continue in future.

Ebitda margins to hover ~30%
We expect DIALs Ebitda margin to hover in the ~30% range over 2013-
15ii. We do not expect LTE to be margin or earnings accretive in this
period. Nevertheless , the telecom regulator enforcing a floor price on
the voice segment has induced price rationality in the market. Therefore
we believe the mobile voice market should see stable growth and
margins.

Outlook and valuations

In the short-to-medium term, we expect DIALs bottom line to benefit
from increased broadband adoption, driven by a governmental initiative
to promote e-governance and knowledge hub vision, and consumer-
driven demand for more broadband. Low penetration of wire (copper
and optical) line as well as limited availability of FTTH (Fibre To The
Home) and FTTB should help drive wireless broadband adoption. We
expect DIALs Ebitda margins at about ~30% over CY13-15ii.
Nevertheless, a slowdown in the economy, price wars on broadband
offerings, and general slackness in broadband pickup by consumers are
significant risks to our forecast. Our revised DCF-based valuation yields
a 12-month target price of LKR9.80, with ~15% upside. ADD

www.randora.lk


Dialog Axiata ADD

4

Financial summary

Income Statement Summary (LKR m)
As at 31st Dec. CY11 CY12 CY13 CY14ii CY15ii
Revenue 45,637 56,345 63,298 71,534 76,105
YoY (%) 10.2 23.5 12.3 13.0 6.4
Gross Profit 20,523 24,129 26,432 43,085 45,838
GP margin (%) 45.0 42.8 41.8 60.2 60.2
Ebitda 16,523 18,357 20,004 24,761 26,652
Ebitda margin (%) 36.2 32.6 31.6 34.6 35.0
Ebit 6,218 6,801 7,664 10,208 12,631
Ebit margin (%) 13.6 12.1 12.1 14.3 16.6
Net Profit - reported 5,354 6,030 5,201 7,938 10,499
YoY (%) 6.1 12.6 (13.8) 52.6 32.3
Net Profit - recurring 6,105 6,272 5,508 7,938 10,499
YoY (%) 11.6 2.7 (12.2) 44.1 32.3
EPS - reported 0.7 0.7 0.6 1.0 1.3

Cashflow summary (LKR m)
Depreciation, Amortisation 10,305 11,556 12,340 14,554 14,020
Other operating cash flow 1,616 5,961 790 (7,608) (3,249)
Cash From Operating Activities 17,853 21,583 19,458 15,686 21,935
Cash From Investing Activities (8,651) (20,864) (28,247) (17,142) (11,416)
Cash from Financing Activities (4,309) (2,409) 2,875 (2,362) (3,572)
Net Changes in Cash 4,894 (1,691) (5,914) (3,818) 6,947
Free Cash Flow 9,134 4,174 (8,802) (1,456) 10,519
Free Cash Flow per share 1.1 0.5 (1.1) (0.2) 1.3
Cash Flow per Share 0.6 (0.2) (0.7) (0.5) 0.9
Balance Sheet Summary (LKR m)
Property, plant and equipment 51,101 59,064 68,468 71,056 68,452
Other non current assets 3,937 10,664 17,578 17,578 17,578
Inventories 436 284 653 288 304
Receivables and prepayments 10,275 12,022 13,924 14,492 15,290
Cash and Cash Equivalents 10,452 8,647 3,218 (600) 6,347
Total Assets 76,201 90,680 103,840 102,814 107,970
Borrowings 24,800 24,927 29,357 29,357 29,357
Payables 13,268 26,164 29,656 23,054 21,282
Other liabilities 4,165 2,408 5,092 5,092 5,092
Total Liabilities 42,232 53,499 64,105 57,503 55,731
Shareholders' Equity 33,969 37,182 39,736 45,311 52,239
Book value per share 4.2 4.6 4.9 5.6 6.4

Segment Ebitda margins
As at 31st Dec. CY11 CY12 CY13ii CY14ii CY15ii
Mobile operations Ebitda 15,278 15,934 17,968 22,050 24,947
Margin (%) 36.6 32.0 32.4 34.8 36.6
Fixed broadband Ebitda (943) 1,778 2,062 1,737 677
Margin (%) na 35.3 35.5 29.6 13.0
Pay TV Ebitda 574 646 703 975 1,027
Margin (%) 24.0 21.6 19.4 23.3 22.5

www.randora.lk

Fitch Affirms Sri Lanka's Dialog Axiata at 'AAA(lka)'/Stable

Fitch Ratings-Singapore/Sydney-12 September 2014: Fitch Ratings has affirmed Sri Lanka-based
telecoms company Dialog Axiata PLC's (Dialog) 'AAA(lka)' National Long-Term Rating. The
Outlook is Stable.

KEY RATING DRIVERS
Parent Support: Dialog's rating of 'AAA(lka) includes a single notch uplift from its stand-alone
credit profile based on Fitch's assessment of strong operational and strategic linkages with its
stronger 83%-parent, Axiata Group Berhad (Axiata) of Malaysia. Fitch believes that Axiata is
likely to provide financial support, if required, to Dialog as it has in the past.

For example, in July 2013, Axiata provided deficiency support to Dialog for an off-shore
syndicated bank facility of USD200m to fund Dialog's capex at a lower cost. In 2009, Axiata
provided a corporate guarantee on Dialog's debt and a shareholder loan when Dialog was under
financial stress. Other linkages include a common brand name and common creditors, which can
result in reputation risk to Axiata should Dialog fail.

Resilient Stand-alone Profile: Fitch assesses Dialog's stand-alone profile at 'AA+(lka)' given its
market-leading position in Sri Lanka's mobile and pay-TV industries, moderate funds flow from
operations (FFO)-adjusted net leverage of below 2.0x and operating EBITDAR margin of over
30%.

Profitability Could Decline: Fitch expects 2014 revenue to rise by 5%, driven by an increase in
mobile data service revenue. However, we expect operating EBITDAR margin could fall by
50bps-100bps each year during 2014-17 (2013: 34.1%) due to changes in the revenue mix as low-
margin data services replace higher margin voice and text revenue. However, profitability could
be supported by an industry consolidation and a regulatory tariff floor on data services.

Capex to Raise Leverage: Fitch expects FFO-adjusted net leverage to worsen to around 2.0x
(2013: 1.8x) on continued large capex investments and tax payments as Dialog comes out of a
tax holiday period. Fitch expects Dialog's 2014 capex to be around 30% of revenue due to
expansion of its 3G data networks. Dialog invested LKR28.3n, or 44% of revenue, in 2013, with
about a quarter of it spent on acquisition of 4G spectrum.

Possible Industry Consolidation: The number of industry participants could reduce to three from
five as Sri Lanka Telecom (BB-/Stable) announced in January 2014 that it was in preliminary
negotiations to acquire Hutchison Lanka and third-largest operator Etisalat could acquire Bharti
Airtel Limited's (BBB-/Stable) unprofitable Sri Lanka subsidiary, Airtel Lanka, which is the
fourth-largest operator. The regulatory tariff floor on voice services has prevented smaller
operators from competing on price and has left them unviable in the medium term.

RATING SENSITIVITIES
Negative: Future developments that may individually, or collectively, lead to negative rating
action include:

- A material dilution in Axiata's ownership or board control in Dialog, removal of the common
brand name, or a weakening of the current strategic and operational ties between the
companies.

Positive: There is no scope for an upgrade as Dialog is at the highest rating on the Sri Lankan
National scale.

www.randora.lk
1. Cumulative Number of Licenses granted under Section 17 of the Sri Lanka
Telecommunications Act No 25 of 1991 as amended.
Category of Service
Licensed under Section 17 of the Act.
2014 Mar
Fixed Access Telephone service 3
Cellular Mobile phones 5
Data Communications (Facility based) 6
Data Communications (Non-facility based) & ISPs 09
Trunk Mobile Radio 1
Leased Circuit Providers 1
Licensed Payphone Service Providers 1
External Gateway Operators 10
Direct-to-Home Satellite Broadcasting Service 03
Cable TV Distribution Network 04
Sub Total 43
SLTL, Lanka Bell, Dialog Broadband are entitled to provide Pay phone and Data services according to
their licences.
2. Statistical Overview of the Telecommunication Sector as at end of Mar 2014
* - Provisional
Number of System Licenses 43
Total number of Fixed phones 2,695,636
Teledensity (Fixed Phones per 100 inhabitants) 13.2
Number of Cellular Mobile Subscribers 21,394,262
Mobile Subscription per 100 people 104.4
?
Internet & Email Subscribers - Fixed 539,631*
Internet & Email Broadband Subscribers (Mobile ) 1,777,955*
Internet & Email Narrowband Subscribers (Mobile ) 2,987,899*
Number of Public Pay Phone Booths 6,284*
www.randora.lk
3. Performance of Fixed Access Telephone Subscribers as at Mar 2014
0
5,00,000
10,00,000
15,00,000
20,00,000
25,00,000
30,00,000
35,00,000
40,00,000
Fixed Access Subscribers 1990 - 2014 Mar
Subscribers
Year
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4

M
a
r
Subscribers
1
2
1
,
3
8
8
1
2
5
,
8
3
4
1
3
5
,
5
0
4
1
5
7
,
7
7
4
1
8
0
,
7
2
4
2
0
4
,
3
5
0
2
5
5
,
0
4
9
3
4
1
,
6
2
2
5
2
3
,
5
2
9
6
6
9
,
1
1
3
7
6
7
,
4
1
1
8
2
7
,
1
9
5
8
8
3
,
1
0
8
9
3
9
,
0
1
3
9
9
1
,
2
3
9
1
,
2
4
3
,
9
9
4
1
,
8
8
4
,
0
7
6
2
,
7
4
2
,
0
5
9
3
,
4
4
6
,
4
1
1
3
,
4
3
5
,
9
5
8
3
,
5
7
8
,
4
6
3
3
,
6
0
8
,
3
9
2
3
,
4
4
9
,
3
9
1
2
,
7
0
6
,
7
8
7
2
,
6
9
5
,
6
3
6
www.randora.lk
4. Mobile Subscribers (1992 2014 Mar)
Year
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4

M
a
r
Subscribers
2
,
6
4
4
1
4
,
6
8
7
2
9
,
1
8
2
5
1
,
3
1
6
7
1
,
0
2
9
1
1
4
,
8
8
8
1
7
4
,
2
0
2
2
5
6
,
6
5
5
4
3
0
,
2
0
2
6
6
7
,
6
6
2
9
3
1
,
4
0
3
1
,
3
9
3
,
4
0
3
2
,
2
1
1
,
1
5
8
3
,
3
6
1
,
7
7
5
5
,
4
1
2
,
4
9
6
7
,
9
8
3
,
4
8
9
1
1
,
0
8
2
,
4
5
4
1
4
,
2
6
4
,
4
4
2
1
7
,
2
6
7
,
4
0
7
1
8
,
3
1
9
,
4
4
7
2
0
,
3
2
4
,
0
7
0
2
0
,
3
1
5
,
1
5
0
2
1
,
3
9
4
,
2
6
2
0
5000000
10000000
15000000
20000000
25000000
19921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014
Mar
Subscribers
Note: The definition of Active subscriber was revised in January 2013
www.randora.lk
5. Internet & Email Subscribers (Fixed & BB Mobile)
0
2,00,000
4,00,000
6,00,000
8,00,000
10,00,000
12,00,000
14,00,000
16,00,000
18,00,000
20,00,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Mar
I & E-mail
Mobile BB
6. Provincial Distribution of Payphones
Western 2,995
Southern 665
Central 771
Sabaragamuwa 295
Uva 239
North Central 312
North West 630
East 297
North 80
Total 6,284
Year Fixed Mobile BB
1996 2,504
1997 10,195
1998 18,984
1999 25,535
2000 40,497
2001 61,532
2002 73,468
2003 85,500*
2004 93,444*
2005 115,000*
2006 130,000*
2007 202,348*
2008 234,000*
2009 249,756* 91,359*
2010 302,000* 200,000*
2011 359,000* 485,000*
2012 423,194* 942,461*
2013 507,845* 1,664,003*
2014 Mar 539,631* 1,777,955*
www.randora.lk
7. Call Duration (In minutes)
2011 2012 2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Incoming Calls
L
o
c
a
l
8
,
8
8
5
,
5
6
0
,
7
9
6
9
,
2
7
8
,
0
0
5
,
3
5
7
9
,
7
1
1
,
5
7
1
,
0
4
8
9
,
8
0
8
,
4
0
5
,
2
1
1
1
0
,
1
8
2
,
5
8
3
,
9
9
3
1
0
,
2
3
9
,
4
8
6
,
0
7
4
1
0
,
6
4
1
,
7
3
4
,
8
6
3
1
0
,
5
1
4
,
8
9
0
,
3
6
7
1
0
,
8
8
1
,
6
7
8
,
1
9
0
1
0
,
4
1
2
,
7
2
2
,
9
1
9
1
0
,
7
7
6
,
5
6
7
,
1
6
8
9
,
5
6
2
,
5
0
1
,
1
7
8
I
n
t
e
r
n
a
t
i
o
n
a
l
4
8
1
,
2
8
9
,
2
9
2
4
9
5
,
5
1
8
,
6
5
6
5
2
3
,
7
3
9
,
2
3
9
4
7
6
,
7
6
2
,
0
1
2
4
9
,
3
2
1
,
6
7
5
4
8
8
,
1
4
5
,
8
0
2
4
9
6
,
4
0
5
,
3
3
8
5
4
5
,
4
9
1
,
6
4
1
5
1
7
,
5
7
7
,
5
4
9
4
7
6
,
8
4
4
,
4
9
8
5
0
4
,
7
1
9
,
6
2
9
4
3
6
,
6
4
8
,
3
6
1
Outgoing Calls
www.randora.lk
8. Employment Opportunities in Telecommunication Sector
Category of
Service
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Fixed Access
Telephony
SLTL
8,793 8,648 8,802 9,126 8,681 8,411 7,303 7,211 7,295 7,172 7,033 6,983 6,557 6,297 6150 6,061 5905
- WLL (Suntel
[+DBN+LBell)
+ DDialog
Broadband?)
476 814 740 783 810 822 833 814 1,053 2,154 2,852 2,532 2,388+
d
2275 1,995 1,524 1459
Cellular
425 552 852 1,016 1,124 1,063 1,699 2,207 2,360 3,525 4,985 5,716 4,969 4,595 4353 4,559 4744
Radio Paging
190 185 148 108 57 30 32 21 N/A N/A N/A N/A N/A N/A N/A N/A N/A
DATA
Communicatio
n
285 318 337 337 437 277 285* 285* 242* 275* 275* 275* 275* 275* 275* 275* 275*
Public
Payphones
116 180 250 353 337 290* 236* 275* 295* 299* 299* 299* 299* 299* 299* 299* 299*
Total
10,285 10,697 11,129 11,386 11,446 10,893 10,388 10,813 11,245 13,425 15,444 15,805 14,488
**
13,741 12,982 12,718 12682
*. Provisional
L
o
c
a
l
8
,
9
3
8
,
6
7
8
9
,
1
9
7
,
1
4
1
,
5
9
0
9
,
7
5
6
,
7
3
2
,
9
6
8
9
,
7
5
6
,
6
8
3
,
8
3
2
1
0
,
0
8
5
,
6
1
3
,
3
7
7
1
0
,
1
9
1
,
9
7
9
,
1
8
9
1
0
,
6
5
8
,
0
9
0
,
9
7
5
1
0
,
4
8
9
,
1
8
3
,
4
8
9
1
0
,
3
4
5
,
2
2
6
,
3
6
4
1
0
,
2
7
1
,
3
1
2
,
6
2
2
1
0
,
8
5
5
,
7
2
6
,
7
8
1
9
,
5
7
1
,
5
3
9
,
7
2
9
I
n
t
e
r
n
a
t
i
o
n
a
l
1
6
9
,
6
1
2
,
4
6
0
1
7
2
,
3
2
5
,
6
6
1
1
7
5
,
0
9
9
,
1
1
1
1
7
7
,
0
2
8
,
4
4
2
1
7
4
,
1
6
4
,
7
8
2
1
7
5
,
2
3
4
,
3
1
4
1
8
2
,
3
7
1
,
9
3
1
1
7
9
,
4
5
5
,
4
4
0
1
6
5
,
2
1
4
,
5
9
7
1
7
8
,
5
0
9
,
1
7
5
1
7
9
,
8
3
6
,
2
4
4
1
6
3
,
6
3
6
,
2
9
6
www.randora.lk

Dialog Etisalat Deal 2014

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Dialog Etisalat Deal 2014

Încărcat de

Drepturi de autor:

Formate disponibile

Dialog Axiata - ADD

Broadband broadens growth prospects

S-ar putea să vă placă și