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Dialog Axiata: Sri Lanka: DIAL SL - FX volatility masks a robust underlying result

  • Cost structure normalising; strong top line growth supports bottom line
  • Data usage remains the driver of growth, while pricing would remain flat
  • Maintain TP at LKR 14.00/share and BUY rating

We maintain our TP at LKR 14.00/share (+12.0% upside; +18.2% TSR) and BUY rating for DIAL. 1Q CY20 earnings were below our estimates, as higher network costs pushed down EBITDA. However, we note that the underlying net profit (ex-LKR 1.7bn FX translation loss) was up 35.6% YoY (+9.3% QoQ). We expect a lower impact from the ongoing lockdowns compared to 2Q CY20 as the digital infrastructure for key operations is active. We also see some one-off cost benefits seen in CY20 continuing in 2Q CY21 but expect this to normalise to some extent in 2H CY21. FX volatility remains a key pressure point for DIAL. While the translation sensitivity will gradually reduce through CY21E with the USD-denominated debt being repaid, impact on DTV profitability will remain. DIAL also focused on network upgrades and expanding 4G mobile bandwidth, continuing its push to drive 4G business.

Cost structure normalising; strong top line growth supports bottom line

Underlying net profit for 1Q CY21 – adjusted for FX translation gain (after tax) – was LKR 3.9bn (+35.6% YoY). While some of the expense items such as bad debt provisions came down YoY in 1Q CY21, we note that group EBITDA margin was flat YoY (41.6%). Management indicated that DIAL booked higher direct expenses for site rentals, and additional frequency purchased during the quarter as well as H One having relatively lower margins impacted this. In addition, we re-iterate that the cost structure is normalising and some of the one off savings on marketing spend last year will return towards 2H CY21E. Accordingly, we expect EBITDA margins to trend at 41.0% for CY21E.

Data usage remains the driver of growth, while pricing would remain flat

Voice business saw a 7.0% QoQ growth in 1Q CY21, while data revenue declined 3.9%. Data usage remained flat QoQ at 8.2GB/user/month indicating that pricing saw pressure. This is in line with our expectations, but we will turn more cautious if price competition picks up again. Unlimited data packages (education/work/entertainment) have diluted the pricing to some extent but added competition could lead to further margin erosion. Mobile subscriber base saw a slight increase (0.7% QoQ) driven mainly by post-paid additions.

Maintain TP at LKR 14.00/share and BUY rating

DIAL is currently trading at 2.4x EV/EBITDA CY21E (vs. 3.1x, 3-year average), and we continue to expect this to rerate to 2.6x over a 12-month horizon. We note that the currency volatility remains a key risk for DIAL, but this would gradually reduce with the repayment of the company’s USD-denominated debt. We maintain our TP at 14.00 (+12.0% upside; +18.2% TSR) and BUY rating.


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