We maintain BUY and increase our TP to LKR 13.00/share (+18.2% to old; +14.0% upside; +17.3% TSR). Overall, we are positive of DIAL’s self-help measures – especially on opex reduction – supporting EBITDA margin expansion once the short-term headwinds (significant bad debt provisions, and concessions during lockdown) fall away. Net profit (ex. FX translational gain) for 2Q CY20 was LKR 1.8bn (-15.2% YoY) with all three segments taking a hit from COVID-related issues. Mobile data usage continued its upward path while pricing was under pressure. DBN saw a net loss with weakening EBITDA on higher international business costs and a drop in fixed line ARPU. DTV losses widened on ~LKR 200mn loss of revenue coming from the free full-access offer extended during the lockdown.
Higher bad-debt provision weighs down EBITDA; recoveries to support 2H
Net profit for 2Q CY20 – adjusted for FX translation gain (after tax) – was LKR 1.8bn (-15.2% YoY). The YoY drop came mainly on the back of an LKR 1.1bn provision for bad debts (2x YoY) given weak collections. Group EBITDA margin came in at 38.0%, flat YoY vs. the weak 2Q CY19 (Post Easter attack quarter). Management indicated that recoveries are gradually normalising, leading to possible provision reversals in 2H. In addition, we note that the cost containment measures – which added LKR 1.9bn in 1H CY20 – would continue to support EBITDA once the bad debt provisions are reversed. Accordingly, we expect a gradual recovery in EBITDA margins through 2H CY20E and CY21E.
Data usage picks up, but pricing continues to trend down; to stabilise in 2H
Data revenue saw a 4.0% QoQ increase in 2Q CY20, mainly driven by a ~17.0% QoQ increase in usage (average GB/user/month at 7.2GB). We believe the usag component will continue its upward trajectory, but revenue to be relatively flat with lower enterprise usage and continued offers (concessionary rates and bonus data). Overall,, we believe data usage will grow 43.0% YoY in CY20E but expect a 25.0% YoY drop in price per GB.
Fixed business and DTV to remain under pricing pressure in CY20E
DBN fell into losses in 2Q CY20, mainly due to weak EBITDA (margin down 10ppt YoY). Management indicated that this was largely due to higher international business costs. Pure fixed line saw strong growth in subscribers (+14.0% QoQ) while ARPU dropped 3.5% QoQ. Given the strong subs addition in 1H, we increase our estimates, but maintain a 15.0% drop in ARPU along with a 3ppt YoY drop in EBITDA margin for CY20E. DTV recorded a steeper loss of LKR 398mn in 2Q CY20, driven by a revenue loss of 200mn due to concessionary full access during the lockdown. While the concessions have since been rolled back, we expect DTV to be under earnings pressure in CY20E.
We increase our TP to LKR 13.00/share and maintain the BUY rating
While DIAL is not immune to the short-term pressures, we note that the cost containment measures will support earnings once COVID-19 headwinds recede. DIAL is currently trading at 2.9x EV/EBITDA CY20E. Using our DCF valuation (WACC of 20.0%) we arrive at a fair value of LKR 13.00, which values the stock at 3.1x CY20E EV/EBITDA (+18.2% to old; +14.0% upside; +17.3% TSR). BUY