Equity Analysis /
Sri Lanka

Dialog Axiata: 1Q 19: Results beat our expectations

    Kavinda Perera
    Kavinda Perera

    Head of Research

    Asia Securities
    29 May 2019
    Published by

    DIAL’s adjusted net profit (ex. FX translational losses) for 1Q CY19 of LKR 3.6bn (+10.4% YoY) came on the back of aggressive subscriber additions and improved cost efficiency. However, we note that price competition in the data business is intensifying, and service bundling becomes key. However, 4G data is more profitable, and we do not see a large hit on overall EBITDA margins. While rising depreciation due to high capex in CY17-18 will absorb EBITDA partially, we see overall CY19E (adjusted) earnings growing by ~9.0% YoY. The current valuation is undemanding, but given the overall weak market momentum, we lower our TP from LKR 13.0 to LKR 12.00 (+30.4% upside; +36.5% TSR) and maintain BUY rating.

    FX gains provide tailwind – normalised results pick up on strong EBITDA

    Reported net profit included a translation gain of LKR 1.3bn (vs. loss of LKR 400mn in 1Q CY18) on the back of strengthening LKR. Adjusted for this, we calculate the underlying net profit at LKR 3.6bn (+10.4% YoY). The growth was mainly supported by strong EBITDA of LKR 12.0bn (+21.0% YoY) with solid pass-through from robust revenue growth (+11.2% YoY).

    Data business seeing price competition; service bundling will become key

    Data revenue saw a 4.0% QoQ drop (+21.0% YoY) in 1Q CY19, which came on the back of 1) strong price competition from Mobitel and 2) fewer operating days. Adjusted for the latter, the drop was 1.7% QoQ. Price competition drove down DIAL’s revenue per GB by 11.3% QoQ to LKR 126 leading to the overall decline in revenue. Given that TRC-approved pricing plans are based on the cost structure, we expect this pressure to ease through CY19E. However, service bundling will become the mainstay in the business, and focus will turn to managing the ARPU. However, we believe that the margins will not see a large impact as 4G data carries better margins (which in turn allows for lower per GB charges) and believe the mobile business would see EBITDA margins of 38.0% in CY19E (vs. 35.9% in CY18).

    DBN result skewed on wholesale business transfer; DTV in losses again

    In CY18, DIAL reclassified its wholesale business to DBN, from the Mobile business earlier, citing tax advantages. Following this, DBN saw top line grow by 82.9% YoY in 1Q CY19, supported by a 54.0% growth in international revenue. However, the wholesale business offers margins of ~1%-2%, which led to EBITDA margins contracting to 38.2% vs. 51.8% in CY18. We believe this dynamic will continue through CY19E until the impact normalises. DTV recorded a further loss in 1Q CY19 on the back of higher content costs. We believe DTV profitability will remain under pressure this year given our house view ~5.0% LKR depreciation in CY19E.

    Slightly lower TP of LKR 12.00/share. Maintain BUY

    The results were above our expectations, but the overall market momentum remains subdued. We believe DIAL’s current EV/EBITDA multiple of 1.6x CY19E is undemanding given its growth profile as the largest mobile telco operator in the country. We lower our TP moves from LKR 13.0 to LKR 12.0 (+30.4% upside; +36.5% TSR) purely on weak market conditions. We maintain BUY.