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Fitch affirms Dialog Axiata at ‘AAA (lka)’; outlook stable 

17 Mar 2021

Fitch Ratings on Monday (15) affirmed the National Long-Term Rating on Sri Lanka-based telecoms company Dialog Axiata PLC at ‘AAA (lka). The Outlook is Stable. Dialog’s Stand Alone Credit Profile (SCP) of ‘AAA (lka)’ is underpinned by its market leadership in the expanding mobile and pay-TV segments. We believe Dialog will continue to gain revenue market share, given its superior execution and mobile networks. The company has a solid financial profile, with consistent revenue growth, a stable operating EBITDA margin and a low Fitch-forecast 2021 FFO net leverage of 0.4x-0.5x (2020 estimate: 0.5x).  Based on unaudited reported results, revenue and EBITDA rose by 3% and 6%, respectively in 2020, before the operating lease adjustment under Sri-Lankan financial reporting standard 16. Dialog’s growth outperformed the GDP contraction of 5% in the nine months ending September 2020, amid the pandemic. Dialog increased its mobile subscribers by 9% YoY, its digital TV households by 12% YoY and home broadband subscribers by 45% YoY during 2020.  “We forecast 2021 revenue to grow by a mid-single-digit percentage and EBITDA margin to remain stable at 38% - 40%, as larger economies of scale in the data segment and cost savings offset falling profits in the voice and text segments. Stronger profitability will be supported by robust growth of data traffic and a likely price hike in the digital TV segment in 2021,” Fitch added.  Fitch also believes Dialog could receive support from its 83% Malaysia-based parent, Axiata Group Berhad (Axiata), if its SCP were to weaken. We assess the relationship between Axiata and Dialog as one of ‘strong parent, weaker subsidiary and moderate linkages’ under our Parent and Subsidiary Linkage Criteria. The linkages include sharing key management personnel, a common name and common creditors, which could result in reputational risk to Axiata should Dialog fail.  “We forecast 2021 cash capex/revenue to be around 30% (2020 estimate: 16%) to address rising demand for 4G network and broadband connectivity due to increased data demand, which was a trend even before the Covid-19 pandemic. The company plans to expand 4G coverage to 95% - 96% of the population, from 94% in 2020. Some of the capex that was committed in 2020 is likely to spill over into 2021 due to import restrictions amid pandemic,” it added further.  Fitch expects Dialog to generate an FCF margin of 2% - 6% in 2021-2023, despite the increase in capex. This is because cash flow from operations is likely to increase due to strong EBITDA margin and stable working capital requirements, which will be sufficient to fund its large capex plan and dividend commitments. Dividends are likely to be around Rs. 5 billion - 6 billion (2020 estimate: Rs. 4 billion).  It also expects 2021 industry revenue to rise by 5% - 7%, driven by a surge in data and fixed broadband, following lower growth of 2% - 3% in 2020. Mobile data service revenue is likely to expand by 15% - 20% (2020F: 25% - 30%) on higher smartphone penetration and rising data consumption.  Dialog’s business risk profile is stronger than that of similarly rated national peers, given its market-leading position in Sri Lanka’s mobile industry, stable cash generation, and integrated service offerings. Dialog’s financial profile is better than that of SLT, with a lower 2021 forecast FFO net leverage of 0.4x - 0.5x (SLT’s 2021 forecast: 1.9x), a larger revenue base and a better operating EBITDA margin. Dialog has demonstrated better market execution than SLT, with expansion of its market share and EBITDA, as Fitch noted. 


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