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DIAL Page | 1

Dialog Axiata PLC

Earnings Review – BUY | Rs.10.00 | March 2016

CASE FOR INVESTMENT

Being the market leader: Dialog Axiata is the market leader for Sri Lankan

mobile market which accounted for nearly 43% of market share. Dialog

broadband Network is Sri Lanka‟s second largest Fixed Telecommunications

service provider, and also a leading provider of Radio and Optical Fiber based

transmission infrastructure facilities.

Attractive performance: The Company continues to perform well in both

mobile and non-mobile (DTV and DBN) segments.

Strong brand name and reputation: Strong brand name and reputation

associated with the group also assists in the development of the business.

Expanded business functions: DIAL is the pioneer for international roaming

facility in Sri Lanka which comprises voice roaming collaborations through 617

operators in 225 countries around the globe.

Improving demand: Increase in demand for smart phones will eventually

improve the demand for mobile data which will positively contribute to the

mobile operation segment.

Strong infrastructure development: Dialog focus on expanding the high

speed Fiber Optic network on island wide together with the establishment of

strong International (Sub-Marine) Optical Fibre connectivity to the Global

Internet via the Bay of Bengal Gateway (BBG) Cable project.

Key Data

Sector Telecommunication

CSE ticker DIAL.N0000

Shares in issue 8.1bn

Public holding 16.68%

52wk High - Low LKR 12.50-9.80

Avg. daily volume 1,945,621

Current MPS LKR 10.00

Market Cap LKR 81.4bn

Market Cap USD 0.6bn

A Member of the Colombo Stock Exchange

Foreign Broker-Dealer of

Maybank Kim Eng Securities USA Inc.

Investor Guide FY13 FY14 FY15 FY16E FY17E

Revenue (LKR mn) 63,298 67,286 73,930 80,954 88,217

Growth 12% 6% 10% 10% 9%

Gross Profit (LKR mn) 26,432 28,489 33,102 35,863 38,904

Growth 10% 8% 16% 8% 8%

EBIT (LKR mn) 7,664 8,054 9,497 10,605 11,574

Growth 13% 5% 18% 12% 9%

PAT (LKR mn) 5,201 6,098 5,187 6,235 7,575

Growth -14% 17% -15% 20% 21%

Gross margin 42% 42% 45% 44% 44%

Operating margin 12% 12% 13% 13% 13%

Net margin 8% 9% 7% 8% 9%

ROE 13% 14% 11% 13% 14%

ROA 5% 5% 4% 5% 6%

EPS (LKR) 0.64 0.75 0.64 0.77 0.93

BVPS (LKR) 4.98 5.59 5.81 6.09 6.52

MPS (LKR) 9.00 13.30 10.70 10.00 10.00

PE (x) 14.1 17.8 16.8 13.1 10.8

PBV (x) 1.8 2.4 1.8 1.6 1.5

DPS (LKR) 0.29 0.13 0.32 0.32 0.32

Dividend payout 45% 17% 50% 42% 34%

Debt to equity 74% 67% 54% 51% 52%

Major Shareholders – 31st

Dec 2015

Axiata Investments (Labuan) Ltd 83.3%

HSBC INTL Nom Limited-BBH Genesis Smaller Companies

2.1%

Employees Provident Fund 1.8%

HSBC INTL Nom Limited-SSBT-National Westminster Bank PLC as depositary of first state Indian subcontinent fund

1.2%

CB NY S/A International Finance Corporation

0.8%

Top 20 shareholders 95.6%

Foreign ownership* 93.7% *as at 11th March 2016

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ASI vs. DIAL

ASI PRICE


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Incorporated in 1993, Dialog Axiata PLC (DIAL) a subsidiary of Axiata Group

Berhad is Sri Lanka‟s largest mobile telecommunications operator. Dialog is the

market leader for Sri Lanka‟s mobile industry which also holds leading positions

in non-mobile segments such as broadband and television.

The company established as MTN Networks Private Limited in 1993 with 90% of

equity through Telekom Malaysia Berhad and 10% by Capital Maharaja

representing as the local party to the investment. In 1995 the company branded

the telecommunication provider under the name of Dialog GSM and again

unveiled under Dialog Telekom in 2005. Further expanding the business, Dialog

acquired Suntel Limited, the second largest fixed telecommunication provider in

the country in December 2011.

In addition to its core business of mobile telephony, the company has a range of

products and services including Dialog TV, the country's Direct to Home

Satellite TV service and Dialog Global which provides international

telecommunication services. Dialog Broadband offers fixed-line and broadband

internet services, whilst Dialog Tele-Infrastructure is the company‟s national

telco infrastructure arm.

The company operates on 2.5G, 3G, 3.5G and 4G LTE communications

networks. Dialog‟s mobile segment serves more than 10 million citizens of Sri

Lanka while Fixed Telecommunications and Digital Satellite Television Services

extended nearly 425,000 and 600,000 Sri Lankan households respectively.

Dialog Axiata is the Sri Lanka‟s largest Foreign Direct Investment (FDI) with

investments totaling to more than USD 1.7 billion. DIAL listed in Colombo Stock

Exchange in 2005.

Dialog has the largest capitalization in the telecommunication sector with a

market capitalization of LKR 82bn compared to LKR 72bn of Sri Lanka Telekom.

Communication Sector

Sri Lankan mobile industry consists of five main licensed players; Dialog Axiata

PLC and Sri Lanka Telecom PLC are the only two listed operators that

dominates the industry with nearly a combined revenue market share of

approximately 80%, out of which DIAL has the higher market share in the

mobile operations segment with a larger mobile subscriber base of over 10mn

(SLT - Over 5mn).

The telecommunication sector is a rapidly developing segment in Sri Lanka to

match with global standards and technologies. The number of mobile

subscribers exceeded 22 million in 2014, which translates to a mobile phone

penetration of 107 compared to 99 in 2013 with a growth of 7.9%. Sri Lanka‟s

total telephone penetration for 2014 was at 120; a growth of 6.7% compared to

the penetration of 112 recorded in 2013. The number of mobile telephone

connections increased by 9%, while fixed wire line telephone connections

recorded a 6% growth in 2014.

Fixed wireless connections continued its declining trend to record a drop of

5.4% in 2014, and this triggered a marginal reduction of 1% in total fixed

telephone connections. The fixed telephone penetration stood at 13 by end of

2014; a decline of 2% compared to 13.2 reported in 2013.

Sri Lanka‟s total internet connections grew 68.4 during 2014, largely supported

by accelerated growth of 86% in mobile internet connections due to growth in

mobile internet usage. The internet connections penetration increased from 9.8

Source – Central Bank of Sri Lanka


The rapid growth of internet connection witnessed from 2010 with the inclusion of mobile internet connections



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to 16.4. Further, active usage of Information and Communication Technology

services in economic activities such as: e-banking, mobile banking, e-bus

ticketing, and mobile points of sale (POS) has also increased during the period

which contributed towards a positive growth in mobile data.

Competitor analysis for Dialog Axiata

Celltel was the pioneer mobile service provider in Sri Lanka who started

operations in early 1990s, while Dialog and Mobitel entered Sri Lankan mobile

industry in 1993. However, Dialog gained the forefront in the industry by

introducing new technologies and providing better coverage, while Celltel

underwent two management changes in 2007 and 2009 (Tigo and Etisala), and

during this period many subscribers migrated to other networks.

Dialog grabbed the customer base through aggressive promotions and strong

coverage where ultimately a brand loyal customer base was created. Mobitel was

not an aggressive player until it was acquired in 2002 by SLT. Currently Dialog

has direct competition form Mobitel as most public servants and their families use

Mobitel „Upahara‟ package.

Voice & Video Calls: Dialog dominates the mobile voice segments (Pre-paid &

Post-paid) and the charges are comparatively in line with the industry rates.

Post paid Prepaid

Same Network Any Network Same Network Any Network

Diolog 1.50 2.00 1.50 2.00

Mobitel 1.50 1.50 1.00 2.00

Hutch 1.50 1.50 1.50 1.50

Etisalat 1.00 2.00 1.50 1.50

Airtel 1.00 2.00 1.00 2.00

Fixed Telecommunication

Mobile Operators Broadband Services Direct-to-home

satellite broadcasting services

Sri Lanka Telecom PLC

Hutchison Telecommunications Lanka (Pvt) Ltd

Dialog Broadband Networks (Pvt.) Ltd

Future Satcom Holding (Pvt.) Ltd

Lanka Bell Limited Etisalat Lanka (Pvt) Ltd

Eureka Technology Partners (Pvt.) Ltd

Dialog Television (Pvt.) Ltd

Dialog Broadband Networks (Pvt) Ltd

Dialog Axiata PLC Etisalat Lanka (Pvt) Ltd DISH TV Lanka (Pvt.) Ltd

Mobitel (Pvt) Ltd

Dialog Axiata PLC

Bharti Airtel Lanka (Pvt) Ltd

Mobitel (Pvt) Ltd

Hutchison Telecommunications Lanka (Pvt) Ltd

TATA Communications Lanka Ltd

Lanka Education and Research Network

Bharti Airtel Lanka (Pvt) Ltd


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In the terms of mobile coverage Dialog and Mobitel have the strongest coverage

compared to other operators. Dialog has strongly covered all the aspects

including GSM, 3G, and 4G etc..., whereas Mobitel has focused on GSM

coverage.

Etisalat has the next best coverage after Dialog and Mobitel, while Hutch has the

minimum level of coverage compared to all telecommunication network

operators.

Mobitel GSM Coverage Mobitel 3G Coverage

Mobitel GSM and 3G Coverage Dialog Island wide Coverage

Etisalat Coverage Airtel Coverage Hutch Coverage


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Dialog is in the forefront of catering mobile telecommunication needs of the

corporate sector, while mobiltel has dominance in the public sector through the

„Upahara Package‟

Dialog Ultra 99 Business Package – Per Minute

Mobitel Upahara Package

Monthly Fee LKR 99.00 LKR 240.00

Incoming Call Charges Free Free

Free Outgoing 50 mins* M2M: LKR 0.50/Free**

Outgoing rate LKR 1.50* LKR 3.00

Free SMS 50* -

SMS rate LKR 0.20* M2M: LKR 0.25, M2Other: LKR 2.00

Free Data 140MB n/a

GPRS Rate LKR 1.00 per MB n/a

*To any network

** UPAHARA Subscribers: Voice and video calls, M2M and to fixed lines including to CDMA lines free, subject to a Fair Usage Policy (FUP) between 12.00 A.M to 6.00 P.M. The charges between 6.00 P.M to 12.00 A.M are LKR 0.50 per minute. Free usage of voice/video facilities are limited to 1,000 minutes per month, between of 12.00 A.M to 6.00 P.M and usage beyond FUP will be

charged at LKR 0.50 per minute.

Making consideration on IDD rates, Dialog IDD rates are comparatively high with its peers.

Per second IDD rates for selected countries

Country Dialog Airtel Etisalat Mobitel Hutch

USA 0.18 0.12 0.15 0.08 0.10

Australia 0.37 0.35 0.37 0.33 0.44

India 0.10 0.10 0.10 0.10 0.07

UAE 0.50 0.45 0.50 0.50 0.34

UK 0.37 0.35 0.37 0.33 0.40

Dialog dominates in the IDD mobile market flowed by Mobitel who is the main

competitor to DIAL. However, all other players are competing heavily in the IDD

market as well as in the data market, as they cannot compete in terms of local

call charges.

Television: Dialog TV currently holds more than 70% market share in pay TV

segment, while PEO TV is the main competitor. Competition from other cable TV

& web TV companies such as SAT Lanka, TV Lanka, and Videocon etc. appear

to be insignificant especially within Colombo. Dialog TV has strengthened their

foot print in other regions in Sri Lanka, where there is very minimal competition.

However, low cost cable TV providers in the region are an imminent threat to

DIAL in the future.

However, the aggressive door to door promotion campaign launched by DIAL

was very strong and successful to achieve an average subscriber growth of 25%-

30% in last few years.


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Network Type Packages Rental Other Fees Benefits

Sri Lanka Telecom - PEO TV

Postpaid 32 – 92

Channels LKR 799.00-

1999.00

Startup fees: SLT customers - LKR

6990.00+Taxes. Non SLT Customers –

LKR 10,000.00-11,000.00+Taxes.

Re-wind system

High quality pictures

Dialog Axiata - DTV

Per day TV

35-48 Channels

Daily rental LKR 3.00-18.00

LKR 4,990.00 High quality pictures

Availability of HD channels

Per day TV Facility

Postpaid 70-111


1949.00 LKR 5,990.00

RP Satellite Network – Dish TV

Postpaid 64-92


699.00 LKR 2,774.00

Low charges

Re-wind system

Recharge facilities

PESTEL analysis for Telecommunication Industry

Political Analysis:

To boost the urban development and technological knowledge of the community,

Sri Lankan government started launching free Wi-Fi zones.

Sri Lankan government and Google signed an agreement to cover the Island with

3G internet under „Google Loon project‟ where Sri Lanka is the first country in the

world to have Internet access covering the whole country with the government

support.

Relaxed FDI (Foreign Direct Investment) standards.

Introduced a common floor rate for the telecom industry - Charge for short

Messages (SMS) increased from cents 10 to 20. Within network, the local voice

call per minute billing basis remained at Rs. 1.50 while per second billing basis

the rate increased from Rs. 1.50 to 1.80 per minute. Outside networks, the local

voice call per minute billing basis decreased from current Rs. 2.00 to Rs. 1.50

per minute while the per second billing basis rate reduced from Rs. 2.50 to Rs.

1.80.

Political

Economic

Social

Technological

Environmental

Legal

PESTEL


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The government removed the VAT and NBT exemptions for telecommunication

companies.

The government recently increased the International Telecommunication

Operator Levy in order to surge the Consolidated Fund by operators.

Telecommunication service providers are subject to an annual fee of LKR 50,000

per telecommunication tower.

Economic Analysis:

Depreciation in Rupee – This may negatively impact high Dollar borrowings in

the telecommunication industry. However, revenue earned in dollars will be a

natural hedge.

Increasing GDP Per Capita - GDP PPP in 2014 was USD 3,654 which enables

the consumers to switch to smart phones that increase the data usage among

the middle class customer base.

Social Analysis:

High end phones have become a status symbol in society and have become an

essential item for day to day lives.

Increasing need for communication and the decline in use of postal services.

Inclination towards internet information.

Busy life styles drives demand for mobile value added services

Technological Analysis:

Value added services such as mobile banking, mobile appointments, mobile

ticket booking etc. are becoming more popular among people

Accelerated improvement in new mobile applications as smart phone usage has

increased to 33% in 2015 compared to 28% in 2013.

High speed internet 4G and 4G-LTE

Equipped with highly advanced technological instruments that are in line with

global standards such as Optical Fibre connectivity

Smart phones have brought a world of possibilities near to the fingertips

Improvement in mobile software drives data usage.

Environmental Analysis

The government charges an annual fee of LKR 50,000 per telecommunication

tower considering the negative environmental impact.

Improvement in “Green Planet‟ project in line with global standards.


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Use of environmentally savvy cell phones.

The amount of carbon released when manufacturing mobile phones, and the

heat emitted when using them has an effect on global warming.

Legal Analysis:

Sri Lanka‟s telecommunication sector operates under highly regulated

environment. Telecommunications Regulatory Commission of Sri Lanka (TRCSL)

acts as the national regulatory agency for telecommunication with in the country.

Sri Lanka Telecommunications (Amendment) Act, No. 27 of 1996 is the regulated

act for Sri Lanka‟s telecommunication sector.

SWOT Analysis for Sri Lankan Telecommunication Industry

Strengths Barriers of market entry Skilled workforce involved in telecommunication industry High profitability and revenue Monetary assistance provided

Strong telecommunication infrastructure developments Huge customer potential Considerable amount of FDIs are coming into the market. (Dialog Axiata, the largest FDI of more than USD 1.7 billion).

Weaknesses Lack in quality of service against growing market demand Lack of consumer awareness in value added service offerings of mobile phone operators (mobile banking, internet banking, easy cash etc...) Market is strongly regulated by the government. Requirement of significant financial resources Very lower growth in ARPU and MOU.

Opportunities Growing demand in broadband and data segments. Growing demand for IDD and roaming facilities Growth in the domestic economy Infrastructure development in rural areas and war effected areas

Threats Changes in government Rules and regulations Changes in government fees and levy‟s Saturation of subscriber base for voice and video call segment Exposure to foreign debt makes many mobile operators vulnerable to foreign exchange losses due to depreciation in LKR Increasing interest rates will affect planned capital expenditure projects. Applications such as Viber, Skype, Whatsapp, and We Chat etc. may damage the voice and video call customer base.


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Budget 2016 impacts for DIAL

The government removed the Value Added Tax (VAT) exceptions on import or supply of telecom equipment or

machinery, high-tech equipment including copper cables for telecom industry. This may lead to an increase in

costs for DIAL which will eventually impact profit margins.

Nation Building Tax (NBT) exemption on telecommunication services was removed from January 2016, which

will adversely affect the top line performance.

Annual charge of Rs.50,000/- per telecommunication tower imposed by the government, will increase the cost of

telecommunication infrastructure services.

International Telecommunication Operator Levy (ITOL) on incoming international calls was increased from USD

9 cents (Out of which USD Cents 3 per minute is credited to the Consolidated Fund by operators) to USD 12

cents. The net increase (USD 3 cents) is to be credited to the Consolidated Fund by operators.

However, as per the request made by the Telecommunications Regulatory Commission on transit tariff revenue

to be exempted from gross turnover for the purpose of cess payment, the government decided to exempt the

Cess levied at 2% on international transit traffic with effect from 01st January 2016. This move will facilitate the

competitiveness in international transit traffic, and will increase the inflow of foreign revenue in to the country.

Therefore, the move does not affect telecommunication operators.

SWOT Analysis for DIAL

DIAL is the dominating player in Sri Lanka‟s Mobile industry that holds nearly 45%

of the market share. The company has played a pivotal role in changing the

landscape of the telecommunication industry. Concentrated strategies would

enable DIAL to convert internal weakness in to strengths, and external threats in

to opportunities, that would facilitate future growth.

Strengths Reputed brand name Being the market leader for Mobile sector and the Direct-to-home satellite broadcasting services Strong infrastructure Strong network coverage spread throughout the island Aggressive and effective advertising and promotions Technical innovations (Example -: Dialog 4G LTE) Dialog was the first operator in Sri Lanka to introduce international roaming facility and currently cover more than 200 destinations with more than 600 partnerships. Having more than 20 years of industry experience which leads to strong customer relationships. Large customer base of more than 10mn for mobile segment with a high growth rate. Expanded value added services improve competitive advantage (Example -: Easy cash) For the first time in Sri Lanka a telephone operator

Weaknesses High pricing compared to other competitors (broadband, IDD etc...) Gap in quality of service against growing market base. High rates for roaming facility. Very lower growth in MOU.


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launched a mobile phone under their brand name as Dialog mobile. Partnership with world famous „Vodafone‟ UK. Diversified into Satellite television sector which minimized the risk of being only in the telecommunication sector. Expanded business opportunities by acquiring Sri Lanka‟s second largest fixed telecommunication provider „Suntel‟.

Opportunities Accelerated growth of telecommunication industry in Sri Lanka. Smartphone penetration is increasing rapidly. Can go for business diversification supported by the parent company.

Threats Constant changes in technology Changes in macro-economic factors. Innovation and new products by other competitors. Peo TV (SLTL) is expanding their foot step as their value added services are higher than DTV (re-wined system, high signal levels). Managing customer requirements.

Financial Performance - Quarter

Net earnings down significantly by 58%YoY on increase in finance costs

and operating expenses

The group recorded a profit decline of 58%YoY to LKR 621mn in 4QFY2015

compared to LKR 1.5bn reported in 4QFY2014.

The profit decline was led by the significant increase in finance costs of USD

borrowings due to the depreciation in LKR.

Top-line grew 16%YoY and 6% QoQ to LKR 20bn in 4QFY2015; underpinned

by notable growth reported in Dialog TV, Dialog broadband and mobile data.

The two associates of the group Digital Commerce Lanka (Pvt) Ltd (Wow.lk)

and Firstsource-Dialog Solutions (Pvt) Ltd posted positive earnings, with a

growth of 157%YoY to LKR 11.2mn in 4QFY2015 against the loss of LKR

19.5mn reported in the comparative year.

Operating profit declined by 27% YoY to LKR 1.6bn in 4QFY15; led by increase

in distribution expenses by 38%YoY and administration expenses by 42%YoY.

These significant increases were led by one-off charges on provision for

impairment on projects which are already embarked, thus included in

administration and distribution expenses.


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Gross margin improved from 44% to 46% during the quarter compared to the

comparative year. Both operating and net margin lost the stance as operating

margin declined from 13% to 8% driven by significant increase in operating

expenses, and net margin declined from 9% to 3% due to the FOREX losses on

borrowings.

The group‟s debt to equity ratio declined to 54% from 67%.

The company used to finance capital expenditure through USD borrowings in

the past, backed by its parent Axiata Company. However, due to expectations of

further depreciation of the LKR, DIAL is planning to retire some foreign debt and

refinance them using domestic debt.

Financial Performance – FY2015

Net earnings down by 15%YoY on forex losses

During FY15 topline of the group grew 10% YoY to reach LKR 73.9bn. This

growth was driven by strong performances across Mobile, Digital Pay

Television, Tele-infrastructure and Fixed Line businesses.

Net profit for the year declined by 15%YoY to LKR 5.2bn compared LKR 6.1bn

posted in FY2014.

Net earnings were affected by the weakening of the local currency against the

USD, which resulted in a forex loss of LKR2.2bn in FY15. However, excluding

the FOREX losses the group would have made reported a 18% YoY growth in

profits to reach LKR 7.4bn.

Group EBITDA improved by 14%YoY to LKR 23.8bn in FY2015 compared to

LKR 20.9bn reported in FY2014. Increase in revenue and improved cost

performance through cost management initiatives attributed towards growth in

EBITDA.

During FY15, gross margin improved from 42% to 45% while EBITDA margin

marginally improved form 31% to 32%. Net margin declined from 9% to 7% due

to the significant FOREX losses. Nonetheless, normalized PAT margin was up

in FY2015 from 9.4% to 10%.

Other Financial Ratios 2011 2012 2013 2014 2015

Capex (LKR bn) 8.7 17.3 20.8 15.2 19.6

Capex growth % 100% 99% 20% -27% 29%

Capex to revenue % 19.2% 30.8% 32.9% 22.6% 26.5%

Return on invested capital % 12.3% 14.2% 10.9% 10.3% 12.3%

Capex grew by 29%YoY to LKR 19.6bn in FY2015 compared to LKR 15.2bn in

the previous year.

Capex in FY2015 was mainly attributed towards high speed broadband

infrastructure, extension of Optical Fibre Network (OFN) and for Bay of Bengal

Gateway (BBG) sub-marine cable project.

The company has been able to manage their CAPEX between 30%-40% levels

in last five years, and maintain a healthy Capex to revenue ratio.


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Debt to equity ratio declined to 54% in the year compared to 67% reported in the

corresponding year.

Segmental performance

Dialog Mobile

Mobile voice revenue grew by 6%QoQ and 16%YoY to LKR 17bn underpinned

by healthy growth in subscriber base, strong growth in data, voice and value

added services pooled with the positive impact of the withdrawal of the 25%

bonus (dialog free talk time) on Mobile Prepaid Domestic Calls which was

effective from 20th Aug 2015.

Small scale screen data users have been the key driving force behind this

growth.

Revenue grew by 9%YoY to LKR 63bn in FY 2015 against LKR 58bn reported

in FY 2014.

Mobile data revenue improved significantly by 64%YoY and 10%QoQ backed

by higher subscriber additions and increased usage.

Average revenue per user (ARPU) grew marginally by 2%QoQ and 6%YoY to

LKR 378 in the quarter. This was fuelled by the strong contribution from data

revenue.

However, minutes of use (MOU) have been lower; 140 minutes recorded in

4QFY2015 compared to 149 minutes reported in 4QFY2014. The decline was

mainly led by the use of other applications like Viber, Skype and WhatsApp.

These applications also hurt the IDD revenue which declined 10%YoY.

During 4QFY2015, Pre-paid mobile segment witnessed a subscriber growth of

6%QoQ and 15%YoY, while Post-paid mobile segment recorded a subscriber

growth of 1%QoQ and 6%YoY. Total mobile subscriber base inclined by

5%QoQ and 14%YoY to 10.9mn in 4QFY2015.

Dialog Broadband

Dialog broadband revenue was up by 8%QoQ and 19%YoY to LKR 2bn in

4QFY2015 led by the notable improvements reported in LTE and leased line

and fiber sharing revenues.

Revenue grew by 19%YoY to LKR 7.3bn in FY2015 compared to LKR 6.2bn

turnover reported in FY 2014.

Fixed revenue inclined by 13%YoY and 10%QoQ underpinned by growth in

fixed LTE subscriptions and enterprise revenue

Broadband subscriber base improved from 28,000 in FY2014 to 100,000 in

FY2015 due to large volume of data usage.

EBITDA grew by 88%YoY and 24%QoQ to LKR 814mn in 4QFY2015 backed

by strong growth in revenue and cost managements. EBITDA for FY2015

improved by 87%YoY to LKR 2.9bn compared to LKR 1.5bn reported in

FY2014.


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EBITDA margin improved from 24.8% to 39.9% in FY2015. For the quarter it

improved from 37.5% to 41.4% on YoY basis.

Net loss narrowed significantly by 86%YoY to LKR 80mn supported by strong

growth witnessed in EBITDA.

Dialog Television

Television revenue increased by 4%QoQ and 16%YoY to LKR 1.5bn supported

by strong subscriber growth in 4QFY2015. Revenue inclined by 23%YoY to LKR

5.8bn in FY 2015 against LKR 4.7bn reported in FY 2014.

DTV Revenue increased led by significant growth (158%YoY) in pre-paid

subscribers as a result of the new pre-paid offer featuring higher rental and

discounted connection fee. Total subscribers grew by 8%QoQ and 44%YoY to

650,000 in 4QFY2015

DTV cost increase was mainly led by the aggressive customer acquisition

alongside service and product expansion activities resulted in a medium term

reduction of EBITDA. EBITDA of the segment declined by 67%QoQ and

87%YoY to LKR 23mn in 4QFY2015. EBITDA margin declined from 13.3% to

1.5% on YoY basis.

Segment narrowed the net loss by 24%QoQ from LKR 243mn in 3QFY2015 to

LKR 184mn in the fourth quarter.

Earning decreased significantly (>100%) on YoY basis in 4QFY2015

subsequent to the decline in EBITDA, higher depreciation and forex losses.

Aggressive subscriber growths were witnessed in mobile segment where the

mobile subscriber base improved to 10.3mn, +10%YoY and in Dialog TV

segment as the TV subscriber base improved to 600,000 with over 66,000

subscribers added during the September quarter 2015.

Future Outlook

We expect DIAL to record a profit growth of 20%YoY to LKR 6.2mn in FY2016

compared to LKR 5.2mn reported in FY2015 backed by increase in revenue.

Revenue may increase by 10%YoY to LKR 80.9bn in FY2016 and LKR 88.2bn,

+9%YoY in FY2017, supported by television and broadband segments.

Television segment may continue the positive momentum with a growth of

23%YoY to LKR 7mn in FY2016 while the fixed telephony & broadband

segments may report revenue of LKR 6.9bn with a growth of 13%YoY. Dialog

mobile operations may witness a growth of 8%YoY to LKR 67bn in FY2016.

Aggressive promotions on Dialog broadband and the 4G-LTE technology may

enable the segment to post healthy revenue. New innovative products such as

easy TV and per day TV packages will give added advantage over competitors.

The Telecommunications Regulatory Commission enforced a common minimum

retail voice call rate for on-net and off-net domestic voice calls, to support

competition between large and small network operators. This may positively

impact DIAL as other operators cannot not compete on price.


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However, dialog voice segment had witnessed a slowdown last few years. The

company expects that the main segments will saturate after 4-5 years as most

of the innovative products get generalized thereafter.

In order penetrate the market in the future, DIAL is investing and testing on new

mobile products such as mobile advertising, mobile commerce, and mobile

payments, further improved mobile TV etc.

Dialog successfully launched their mobile payment facility through Easy cash.

Currently 2.2mn subscribers have registered for this service, and 250,000

subscribers actively use the service. The company plans to further add features

to this service to make the product more popular in the country.

Dialog used SLTL cable system where the company paid USD 45 for a port.

However, DIAL invested in an optical fiber network which enables them to

reduce the costs.

The exemptions for import or local purchase of any machinery or high tech

equipment for telecom industry which was previously held was totally removed

from March 2016 and the VAT rate increased from 11% to 15% which will

adversely affect the margins of the group.

Gross margin may slightly decline during FY2016 from 45% to 44% while

operating margin may remain unchanged at 13%. Gross profits may hurt by the

expansion on direct costs following to the macro economic factors. Net margin

may slightly increase from 7% to 8%.

Return on equity may improve from 11% to 13% in FY2016 while return on

assets may improve from 4% to 5%.

Debt to equity ratio may decline further to 51% in FY2016 compared to 54% in

FY2015.

Valuation

The counter is currently trading at a PE of 15.7x which is a 6% discount to the

telecommunication sector PE of 16.7x while the PBV of 1.7x is trading at a

premium to the sector PBV of 1.3x. DIAL is currently trading near to its 52wk low

price of LKR 9.80.

DIAL is an attractive dividend payer with a good dividend payout. The company

declared a dividend of LKR 0.32 per share for FY 2015 which translated to a

dividend payout of 50%.

Based on a reasonable historical (3-year) price earnings ratio, the medium to

long term target price for the share is LKR 12.40 which is an upside of 24% to

the current market price.


DIAL Page | 15

Disclaimer

This information and opinion contained in this report have been complied by our research department from sources

believed by it to be reliable and in good faith, but no representation or warranty, express or implied is made as to their

accuracy, completeness or correctness. All opinions and estimates contained in the document constitute the

department‟s judgment as of the date of this document and are subject to change without notice and are provided in

good faith but without legal responsibility.

This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any securities.

Capital Trust Securities (Pvt) Ltd. (the company) or persons connected with it may from time to time have an

investment banking or other relationship, including but not limited to, the participation or investment in commercial

banking transactions (including loans) with some or all of the issuers mentioned therein, either for their own account or

the account of their customers. Persons connected with the company may provide or have provided corporate finance

and other services to the issuer of the securities mentioned herein, including the issuance of options on securities

mentioned herein or any related investment and may make a purchase and/or sale, or offer to make a purchase and/or

sale of the securities or any related investment from time to time in the open market or otherwise, in each case either

as principal or agent.

This report may contain forward looking statements which are often but not always identified by the use of words such

as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an

event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions.

Such forward looking statements are based on assumptions made and information currently available to us and are

subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in

any forward looking statements. Readers are cautioned not to place undue relevance on these forward looking

statements. Capital Trust Securities expressly disclaims any obligation to update or revise any such forward looking

statements to reflect new information, events or circumstances after the date of this publication or to reflect the

occurrence of unanticipated events.

Exchange rate fluctuations may affect the return to investors. Neither the company nor any of its affiliates, nor any

other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or

the information contained therein.

Capita TRUST Securities (Pvt) Ltd, their respective affiliate companies, associates, directors and/or employees may

have investments in securities or derivatives of securities of companies mentioned in this report, and may make

investment decisions that are inconsistent with the views expressed in this report.

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not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing

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TRADING DIVISION BOARD OF DIRECTORSTushan Wickramasinghe (011)-2174184 0777-313456 Moksevi Prelis (Chairman)Dakshana Gooneratne (011)-2174194 0777-360492 Tushan Wickramasinghe (Managing Director/CEO)Lawrence David (011)-2174164 0777-289331 Methmal Senivirathne (CFO)M J M Husni (011)-2174102 0773-219503Sandesh Jayakody (011)-2174103 0773-733273Nilantha Perera (011)-2174104 0777-715970Saliya Gamagedera (011)-2174108 0773-219506Asanka Perera (011)-2174109 0773-291847Shanmugassharma Rakesh (011)-2174117 0777-536877Rasika Vidanalage (011)-2174119 0777-536898Thilina Yahampatharachchi (011)-2174131 0773-219502Sajee Perera (011)-2174113 0777-287941Gayan Vithanage (011)-2174114 0777-287933Anushan Kandasamy (011)-2174123 0777-722622Shehan Mendis (011)-2174134 0777-305684Chamila Fernando (011)-2174121 0777-536887Dilshard Hameed (011)-2174132 0773-142242Danushka Arambegedra (011)-2174122 0777-270867Laxman Ratnayake (011)-2174116 0777-287948

KANDY BRANCHArjuna Wilbawa (081)-2205 486 0773-291846Dasantha Herath (081)-2205 493 0773-865305Mohomed Faizan (081)-2205 491 0777-840256FAX (081)-2201050

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MATARA BRANCHVenura Gamage (041)-2236200 0773-936222Jagath Rathnayake (041)-2236204 0773-758304Tharanga Wijeweera (041)-2236208 0777-359156FAX (041)-235644

MORATUWA BRANCH CAPITAL TRUST RESEARCH (PVT) LTDSuneth Fernando (011)-2642 516 0773-633533 Charitha Gunasekere (011)-2174140 0773-865301Bhanuka De Silva (011)-2642514 0777-305774 Melani Nawaratne (011)-2174190 0777-270839Asoka Dharmatilaka (011)-2642517 0773-865300 Ruvini Kaushalya (011)-2174141 0777-270922FAX (011)-2648747

CUSTOMER SERVICE DIVISION CAPITAL TRUST CREDIT (PVT) LIMITEDPrashani Perera (011)-2174167 0773-167777 (011)-2174153 0775-754078

ACCOUNTS DIVISION CAPITAL TRUST FINANCIAL (PVT) LIMITEDMethmal Senivirathne (011)-2174110 0777-766727 Anushan Kandasamy (011)-2174123 0777-722622Ranjini Jayawardena (011)-2174142 0773-596336Subani Wimalarathne (011)-2174143 0772-015882Kumari De Alwis (011)-2174144 0772-015886

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TELEPHONE : (011)- 2 174 174 HOTLINE : (011)- 2 174 175 FAX : (011)- 2 174 173 E MAIL : [email protected]

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