Equity Analysis /
Sri Lanka

Dialog Axiata: Q1 CY 20 – Digitisation push and data usage drives EBITDA

  • Data usage shows strong growth, but pricing to trend down in CY 20e

  • Fixed business and DTV to remain under pricing pressure in CY 20e

  • We maintain Buy, but cut our TP to LKR 11.00/share

Asia Securities
15 May 2020
Published byAsia Securities

We maintain BUY but cut our TP to LKR 11.00/share (-26.7% to old; +25.0% upside; +27.6% TSR), factoring in some of the short-term headwinds. Overall, the move towards a digital economy would support DIAL’s EBITDA going forward. Adjusted net profit (ex. FX translational loss) for 1Q CY20 was LKR 2.8bn (-24.1% YoY). Data usage as expected continues its upward path, while higher adoption of digital distribution and paperless operations would add to organic EBITDA. High depreciation would absorb these gains partially, but with 4G capex tapering down, we see depreciation moderating in the next few years. DIAL’s USD borrowings are a major source of earnings volatility but given the partial natural hedge with USD revenue we do not see this loss crystalising when its due to be paid from 4Q CY20E onwards.

Push towards digitisation and cost savings to support EBITDA

DIAL’s 1Q CY20 bottom line adjusted for FX translation loss (after tax) was LKR 2.8bn (-24.1% YoY). Higher depreciation (+7.7% YoY), drove the dip while top line (+0.9% YoY) and EBITDA (+1.0% YoY) growth was modest. The underlying growth driver of EBITDA for the mobile business; higher 4G adoption and network utilisation are on an upward trend, while the self-help measures such as digitisation are also improving. Changes in consumer behaviour during the lockdown (work-from-home, digital reloads and activations, etc.) have helped to push this. Given this, we expect EBITDA margins to be supported in CY20E.

Data usage shows strong growth, but pricing to trend down in CY20E

Data revenue saw a 4.0% QoQ increase in 1Q CY20, mainly driven by a 10.0% QoQ increase in usage (average GB/user/month at 6.2GB). This indicates that price per GB has seen a further drop which we believe was a result of the bonus data offers seen during the last few weeks of March. With the extended lockdowns and work from home activity, we believe the usage component will have a strong pickup, although balanced out somewhat with less enterprise usage. Overall, we believe data usage will grow ~40.0% YoY in CY20E but expect ~30.0% drop in price per GB considering the extended period of offers.

Fixed business and DTV to remain under pricing pressure in CY20E

DBN turned a net profit in 1Q CY20 after two quarters of losses. Pure fixed line business revenue growth continues to be soft (+0.5% YoY), with a strong growth in subscribers (+16.5% YoY) offset by a 16.2% YoY drop in ARPU. We expect subs addition to slowdown for the rest of the year, and ARPU to see a drop along with a contraction in EBITDA. DTV net losses narrowed in 1Q CY20, but we expect revenue and EBITDA to remain weak in CY20E with discounts and other concessions (ARPU -15.0% YoY) and soft new subs (+5.0% YoY vs. 25.1% in 1Q).

We cut our TP to LKR 11.00/share but maintain the BUY rating

While the shift to a digital economy during and after the lockdowns will be a positive for DIAL, the company is not immune to the short-term pressures. DIAL is currently trading at 2.5x EV/EBITDA CY20E. Using our DCF valuation (ERP of 20%; β of 1.0) we arrive at a fair value of LKR 11.00, which values the stock at 2.9x EV/EBITDA CY20E (-26.7% to old; +25.0% upside; +27.6% TSR). We rate BUY, highlighting that our worst-case value (DCF-based) is LKR 7.50-8.00/share.