We downgrade DIAL to Hold with an unchanged TP of LKR12.00/share (+10.1% upside; +14.6% TSR). Overall, we see increasing competitive pressure on data business weighing on ARPUs despite an increase in data usage. Coupled with SLFRS 16 implementation, we expect CY 19e bottom line to remain muted. Adjusted net profit (eg, FX translational losses) for Q2 CY 19 of LK 2.1bn was weak (-34.8% yoy), coming from a soft EBITDA and SLFRS 16-led depreciation and interest charges. Price competition and the impact of the Easter attacks led to a pullback in EBITDA margins, and we expect to see a slight pick up in H2 CY 19. The DBN business too is undergoing a structural drop in ARPUs, with more prepaid customers being added to the mix as post-paid affordability is low at current pricing.
EBITDA margins take a hit from Easter attacks and price competition
Underlying net profit of LKR2.1bn (-34.8% yoy) was weak, largely driven by 1) a setback in EBITDA margins (38.0% vs. 38.9% in Q2 CY 18 and 41.6% in Q1 CY 19) and, 2) higher depreciation and interest cost coming from SLFRS 16 adoption. EBITDA weakness was largely a result of tighter price competition, which led to a data price correction at the end of Q1 CY 19. In addition, the social media blockage (especially YouTube) following the Easter Sunday attacks weighed on EBITDA, while increasing receivables further impacted the result. The headwinds more than offset the gains from cost savings (LKR 1.6bn in H1 CY 19).
Data usage sees robust pick up, but lower pricing leads to stable margins
Data revenue saw a 3.0% qoq increase in Q2 CY 19, stabilising from the drop seen in Q1 CY 19. Usage saw a strong pick up with average GB/user/month up 20.0% qoq to 4.8GB, but revenue per GB dropped by 18.0% qoq to LKR 95 with repricing taking full effect. Looking ahead, we expect the upcoming election period to drive usage up further, but the structural drop in prices mean that incremental consumption would be at a relatively lower margin. We had already factored in this shift and hence, do not expect a major revision to our overall EBITDA estimate for CY 19e.
Fixed business ARPU to trend structurally lower in the next few years
DIAL’s fixed business (ex-wholesale) saw revenue increase by 12.3% yoy, albeit its customer base contracting by 3.9% qoq. Management indicated that the affordability for postpaid connections would be reaching saturation at current income levels and hence, the focus would be on adding more prepaid customers. We expect this business to undergo a structural reduction in ARPU in the next few years with this change. However, we expect the fixed business margins to remain stable, as more postpaid users would lead to lower churn.
We maintain our TP at LKR 12.00/share, and downgrade to Hold
With the results below our expectations, we adjust our CY 19e estimates. DIAL currently trades at an EV/EBITDA multiple of 2.8x CY 19e compared with 4.0x SLT. While this indicates the possibility of a re-rating, with tight competition impacting the core business, and the first-year impact from SLFRS 16 hitting earnings in CY 19e, we maintain our TP at LKR 12.00/share (+10.1% upside; +14.6% TSR), and downgrade to Hold.