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Dialog Axiata DIAL – Rs.14.5 Dialog Axiata 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 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 31 May 2018 . On revised earnings, DIAL trades at PERs of 9.8X for 2018E and 8.5X for 2019E, with Sri Lanka EV/EBITDA multiples of 3.8X for 2018E and 3.5X for 2019E and provide relatively high ROEs Telecommunications 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 CTCT CLSA CLSA SECURITIES SECURITIES (PVT) (PVT) LIMITED LIMITED | A| Member A Member of the of Colombothe Colombo Stock StockExchange Exchange 1 Dialog Axiata 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 4G 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 .
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