Fitch affirms Dialog rating at ‘AAA(lka)’ Stable

Fitch Ratings has affirmed the National Long-Term Rating of Dialog Axiata PLC at ‘AAA(lka)’ with a Stable Outlook.

Fitch said that Dialog’s standalone credit profile of ‘AAA(lka)’ is underpinned by its market leadership in the growing mobile and pay-TV market segments and believes that the company is in a position to gain revenue market share from smaller telcos, given its superior execution and mobile networks.

The rating agency expects Dialog to receive support from its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken. Under Fitch’s parent-subsidiary linkage criteria, the relationship between Axiata and Dialog is classified as one of a “strong parent, weaker subsidiary and moderate linkages”. The linkages include sharing key management personnel, a common name and common creditors, which could result in reputational risk to Axiata should Dialog fail.

The company has a solid financial profile, with industry-leading revenue growth, a stable operating EBITDAR margin of 37%-38%, and a low Fitch-forecast 2019 FFO adjusted net leverage of around 1.0x (estimated 2018: 1.0x). Fitch forecasts revenue to grow by the high-single-digit percentage (barring any tax shocks) during 2019-2020, driven by data services revenue growth of 30%-35% (2018: 32%). Revenue and EBITDA grew by 16% and 18% respectively during 2018, based on preliminary financial results and the government’s 2018 announcement on the removal of floor rates for voice call charges are expected to have only a limited impact on growth.

Fitch forecasts Dialog’s operating EBITDAR margin to remain stable, as larger economies of scale in the data segment offset falling profitability in the voice and text segments. Strong data growth is supported by proliferation of smartphones; over 80% of new handsets activated on Dialog’s network are 4G-enabled. Telecom tower tax of LKR 200,000 per tower (effective from January 2019) will have only a limited impact on operating EBITDAR margin given annual tax liability of around Rs. 400 million – about 0.4% of 2018’s revenue.

The agency expects limited FCF during 2019-2020 as cash flow from operations will be just sufficient to fund the large capex plan and dividend commitments. We forecast capex/revenue to be around 28%-30% to expand the 4G networks and optical fibre infrastructure during 2019 – 2020. Dividends are likely to be around LKR 3 billion – 4 billion (2018 estimate: LKR3.7 billion).

Dialog’s ratings have sufficient headroom for the company to undertake a debt-funded acquisition of a smaller operator, according to Fitch. However, it said any rating action would depend on the acquisition price, funding structure, and the financial and operating profile of the combined entity.