DIAL – Rs.14.5

Key Highlights Sanjeewa Fernando email : [email protected] 1Q2018 Results Update Phone : +94 777 427439 . 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 and 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 31 May 2018 . 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

Key Trading Information Relative Share Price Movement (%)

Shares in Issue (mn) 8,143.8 130

Market Cap (US$ mn) 748.4 120 Estimated Free Float (%) 16.7 DIAL 110 3M Avg Daily Volume 901,366.3

3M Avg Daily Turnover (US$) 79,950.4 100 ASI 12M High / Low (Rs) 14.8/11.2 90 3M / 12M Price Chg (%) 7.4/23.9 30-May-17 27-Nov-17 30-May-18

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

Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS CTL 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

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The Business

Dialog Axiata (DIAL), an 83.3% owned subsidiary of the Malaysian Axiata Group, is Sri Lanka’s leading mobile telco (estimated SIM market share of 44.2%), and also has a strong presence in broadband, tele-infrastructure, Pay TV and CDMA (Code Division Multiple Access) Recent Financial Performance

1Q2018 NP +84% YoY, . DIAL reported a 1Q2018 net profit (NP) of Rs.2,842mn (+84% YoY and -10% QoQ), broadly -10% QoQ in line with our expectations, driven by revenue growth and improved EBITDA margins DIAL: Subscriber Growth Prepaid subscribers (mn) - LHS Quarterly Highlights Postpaid subscribers ('000) 12 1,400 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 1,300

11 Operating Expenses (Rs mn) 15,701 14,944 16,124 7.9 2.7 57,533 60,345 4.9

1,200 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 9 1,100 1Q2016 1Q2017 1Q2018 Net Finance Income / -Cost (Rs mn) -467 -892 -973 9.0 >+100.0 -2,363 -2,355 -0.4

DIAL : ARPU (Rs.) & EBITDA Margin (%) Net Profit (Rs mn) 3,171 1,546 2,842 83.8 -10.4 9,041 10,785 19.3 Avg Revenue Per User (Rs) Earnings per Share (Rs) 0.4 0.2 0.4 83.8 -10.4 1.1 1.3 19.3

Group EBITDA margin - RHS EBITDA Margin (%) 36.7 32.6 38.2 5.6 4.1 33.7 35.9 2.3 410 39 Average Revenue Per User - ARPU (Rs) 392.0 375.0 390.0 15.0 -2.0 396.0 387.0 -9.0 37 Minutes Of Use - MOU per month 118.0 123.0 118.0 -4.1 0.0 133.0 120.0 -9.8 390 35 Revenue Per Minute – RPM 3.3 3.0 3.3 8.4 -0.5 3.0 3.2 8.3

33 DIAL : Smart Phone Penetration 52.0% 47.0% 53.0% 12.8 1.9 45.0% 52.0% 15.6

370 31 Capex (Rs mn) 13,499 3,994 2,385 -40.3 -76.6 26,363 30,635 16.2 1Q2016 1Q2017 1Q2018 Capex Intensity (%) 54.4 18.0 9.1 -8.9 -45.3 30.4 32.5 2.1

DIAL: MOU and Growth Net Debt to EBITDA (X)^ 0.8 1.0 0.8 -0.2 -0.1 0.9 0.8 -0.1

Minutes of Usage (MOU) / Month Note: Valuations and ratios on a recurring basis; Adjusted for capital issues (if any) Source: Company interims ^ As at end period QoQ Growth (%) - RHS 142 3 . Revenue rose +18% YoY (+5% QoQ) to Rs.26,083mn in 1Q2018 largely driven by growth in data revenue due to increased small screen penetration. Telco data levy of 10% was removed 132 0 w.e.f. 1 September 2017 resulting in the effective indirect tax on data reducing from 31.7% to 19.7%

122 -3 o Mobile Data revenue rose +7% QoQ in 1Q2018 due to increased small screen penetration and conversion o Fixed Home Broadband Revenue rose +17% QoQ and +49% YoY in 1Q2018, 112 -6 amid expanding network coverage and aggressive subscriber acquisitions 1Q2016 1Q2017 1Q2018 o Television revenue rose +9% QoQ and +9% YoY in 1Q2018 driven by increased subscription revenue and advertising revenue o International Termination Revenue rose +12% QoQ and +27% YoY in 1Q2018 due to growth in wholesale business coupled with a temporary ban on OTT (FB, Viber and whatsapp etc.) usage during March 2018

A CT HOLDINGSHOLDINGSEQUITY GROUP GROUP REPORT AND AND CLSA TITLE CLSA GROUP |GROUP Date COMPANY COMPANY 2 Dialog Axiata

Quarterly Highlights

. EBITDA margin improved to 38.2% in 1Q2018 (from 32.6% in 1Q2017 and 36.7% in LKR Change vs. Forex (Loss) / Gains 4Q2017) due to significantly reduced Sales & Marketing Opex (S&MO) to 10.9% of revenue in 1Q2018 (vs.14.6% in 4Q2017 and 15.2% in 1Q2017) as a result of adopting SLFRS 15 Forex gain / (loss) Rs mn - LHS w.e.f. 1Q2018 (as customer acquisition costs are capitalized under SLFRS 15)

US$:LKR change % . Net Finance Costs (NFC) rose +9% YoY (+>100% QoQ) to -Rs.973mn in 1Q2018 due to a 2 relatively volatile LKR (that includes a ~Rs.400mn FX loss in 1Q2018) and a relatively high LIBOR due to rising international interest rates. Meanwhile DIAL’s Net Debt increased by -50 Rs.2,430mn QoQ to Rs.30,615mn as at 31 March 2018 with Net Debt to EBITDA however falling to 0.77X as at 31 March 2018 from 0.83X as at 31 December 2017 due to improved 0 EBITDA levels

-300 . Capex of Rs.2,385mn (-40% YoY, -77% QoQ) during 1Q2018 was directed towards -2 investments in High-Speed Broadband infrastructure consisting of capacity upgrades and LTE focused coverage expansion. Investment in Data infrastructure included 4G capacity upgrades and 4G coverage expansion -550 -4 1Q2016 1Q2017 1Q2018 . The Government of Sri Lanka (GoSL) proposed Cellular Tower Levy (CTL: of Rs.200,000 per tower per month from tower owning mobile companies - w.e.f. 1 Apr 2018) is highly unlikely to be implemented (as it is) given the impracticality of the fiscal proposal DIAL: Capex and Capex Intensity o If imposed, CTL will wipe off Rs.5bn p.a. from DIAL, given its ~2,100 tower ownership Capex (Rs bn) - LHS . DIAL purchased an 80.3% stake in Colombo Trust Finance (CTF) during 3Q2017 in order to Capex as a % of Revenue leverage its presence in the E –commerce space via FinTech. During 4Q2017 DIAL further 16 60 increased its ownership in CTF to 98.9%, following the conclusion of the mandatory offer on 2 November 2017. DIAL expects to commence its Digital bank from 2Q2018E 50 12 40 o Based on the CBSL guidelines, DIAL is expected to infuse ~Rs.500mn each from 2018E to 2020E, to be compliant with Basel III capital regulatory requirements (for the 8 30 2017 capital infusion of Rs.550mn, DIAL received a 6 month extension up to June 2018) 20 4 . During late April 2018, Hutch – Sri Lanka announced its plans to merge with Etisalat 10 – Sri Lanka, in order to remain relevant in a crowded 5 player market. If the deal is approved by the regulator, resultant 4 players in the market will have the following spectrum 0 0 and market shares 1Q2016 1Q2017 1Q2018 Sri Lanka Mobile-Telco Sector : Post Hutch + Etisalat Merger Scenario Analysis Subsidiary EBITDA Margins (%) DBN EBITDA Margin (%) Post-Merger Scenario (Rank) DIAL (#1) MOB (#2) HUT + ETI (#3) AIR (#4) DTV EBITDA Margin (%) - RHS Total Spectrum* (MHz) 127.5 50.0 50.0 22.5 64 15.0 Subscriber market share (%) 44.2% 28.0% 18.6% 9.2% Estimated Customer base (mn) 13.0 8.1 5.4 2.7 54 10.0 Sri Lanka Mobile-Telco sector : Detail Spectrum Breakdown as at 31 Mar 2018 2G and 4G - 1800 MHz 44 5.0 Operator 2G - 900 MHz band 3G - 2100 MHz band 4G Fixed 2300 MHz band 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) 34 0.0 1Q2016 1Q2017 1Q2018 ETI 7.5 10.0 - 7.5 HUT 7.5 10.0 - 7.5 AIR 5.0 10.0 - 7.5 DTV Subscribers LTE = Long Term Evolution, MOB: Mobitel, HUT: Hutch – SL, ETI: Etisalat SL, AIR: Airtel SL DTV-Pre Paid ('000) - LHS DTV-Post Paid ('000) . With a resultant 4 player market in the near term, 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 600 450 order to help maintain DIAL’s industry dominance resulting in a healthy mobile operator market in the medium to long term

400 . Dialog TV (DTV) meanwhile reported a net loss (NL) of -Rs.126mn (-23% QoQ) for 1Q2018 420 compared to a NL of –Rs.736mn in 2017, largely driven by content costs (that are incurred in US$ terms: ~50% of DTV’s costs are incurred on content acquisition) 200 . 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 Fixed 0 390 LTE Revenue. In 3Q2017, DIAL launched the pre-paid offering for Fixed Home Broadband in 1Q2015 3Q2016 1Q2018 order to expand affordability and to reach a wide spectrum of domestic Households CTCT CLSA CLSA SECURITIES SECURITIES (PVT) (PVT)EQUITY LIMITED LIMITED REPORT | A | Member A MemberTITLE of the| of Date Colombo the Colombo Stock ExchangeStock Exchange 3 Dialog Axiata

Outlook & Valuations

NP revised down by -3% . DIAL’s NP forecasts for 2018E and 2019E are revised down by -3% and -5% to and -5% for 2018E and Rs.12,054mn (+12% YoY) and to Rs.13,885mn (+15% YoY) on account of revised 2019E 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

EBITDA margins revised . DIAL’s EBITDA margin for 2018E is revised up to 37.5% (from 37.0% previously) due to up owing to cost rescaling relatively high EBITDA levels reported in 1Q2018, owing to capitalization of customer initiatives 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 Finance costs revised up due to rising int’l interest revisions are attributed to revised LKR/US$ and LIBOR assumptions with total AEIRs rates and revised LKR estimated at 8.6% each for 2018E (vs. 7.3%: 2017) and 2019E and LKR forecast at outlook 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

Implementation of . We believe the recently proposed CTL will likely have a significant negative impact on the Cellular Tower Levy investor sentiment if implemented, and thus expect CTL to be repealed / amended by (CTL) unlikely 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

Average ROEs of . On revised earnings, DIAL trades at PERs of 9.8X for 2018E and 8.5X for 2019E, with ~20% on offer 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

A potential merger with . We believe that the recent re-rating of the share is justified given DIAL’s recently improved Airtel could re-rate DIAL earnings fundamentals. A potential merger / acquisition between DIAL and Airtel (the share in the medium term remaining acquirable candidate) could remain as a further catalyst to improve and sustain the share price in the short to medium term

A CT HOLDINGSHOLDINGSEQUITY GROUP GROUP REPORT AND AND CLSA TITLE CLSA GROUP |GROUP Date COMPANY COMPANY 4 Dialog Axiata

DIAL Forecast Financials

Key Figures : Income Statement (Rs mn) 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

^Previous forecast, CTL impact of ~Rs.5bn for 2018E and 2019E (w.e.f. 1 Apr 2018) is not factored into our forecasts

Balance Sheet Ratios

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

Sri Lanka – Mobile Operator SIM Market Share Behaviour

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%

DIAL: Coverage (PoP) DIAL : 4G Devise vs. Smart Phone Penetration (Own base)

2G 3G 4G (Mobile) 4G (Fixed) 60% 100% 50%

80% 40% 30% 60% 20% 40% 10% 0% 20% 1Q2016 1Q2017 1Q2018 Dialog Axiata 4G devise penetration 0% Smart phone penetration (own base) 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 Source: DIAL

CTCT CLSA CLSA SECURITIES SECURITIES (PVT) (PVT)EQUITY LIMITED LIMITED REPORT | A | Member A MemberTITLE of the| of Date Colombo the Colombo Stock ExchangeStock Exchange 5 Dialog Axiata

Major Shareholder Movements

Major Shareholder Movements as at 31 March 2018

Change No. Name No. of Shares % Comment (Shares)*

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

HSBC International Nominees Limited - BBH - 18. Prusik Asian Smaller Companies Fund Public - Limited Company 18,200,000 0.2

HSBC International Nominees Limited - SSBT- 19. - Parametric Emerging Markets Fund 17,294,868 0.2

The Ceylon Guardian Investment Trust PLC A/C 20. - No. 02 16,470,454 0.2

Total 7,829,008,481

*Change since 28 February 2018

A CT HOLDINGSHOLDINGSEQUITY GROUP GROUP REPORT AND AND CLSA TITLE CLSA GROUP |GROUP Date COMPANY COMPANY 6 Dialog Axiata

Research Trading & Sales Consultant / Sales

Sanjeewa Fernando Lasantha Iddamalgoda Rohan Fernando [email protected] [email protected] [email protected] +94 77 742 7439 +94 11 255 2295 +94 11 255 2297 +94 77 778 2103 +94 76 778 2101 Chayanika Ranasinghe [email protected] Dyan Morris +94 77 237 9731 [email protected] +94 11 255 2320 Yasas Wijethunga +94 77 722 4951 [email protected] +94 77 053 2059 Manura Hemachandra [email protected] Shahan De Silva +94 77 261 4797 [email protected] +94 11 255 2290 Ryan Janz [email protected] Subecca Sothylingam +94 77 547 9233 [email protected] +94 11 255 2290 Rosco Todd [email protected] Madhusha Sivanathan +94 77 262 7233 [email protected] +94 11 255 2290 Dhammika de Silva [email protected] Shahana Kanagaratnam +94 77 356 2699 [email protected] +94 11 255 2290 Arusha Michael [email protected] +94 77 395 6765

Nuwan Madusanka [email protected] +94 76 858 9722

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