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JKSB Full Year Highlights_Dialog Axiata PLC (DIAL)_CY16

Note Summary:

DIAL reported a strong 74% YoY increase in full year Group earnings for CY16, supported by 1) healthy topline and EBITDA growth (+17% YoY & +23% YoY respectively); and 2) lower unrealised forex losses (non-cash forex translational losses of Rs. 0.8mn in CY16 vs. Rs. 2.2bn in CY15), due to a lower depreciation of the rupee vs. CY15 and a partial shift to LKR borrowings (LKR:USD debt split now at 30:70 vs. 100% dollar debt in CY15). At a subsidiary level, DTV reported a net loss of Rs. 644mn for the year, on the back of costs relating to an expansion of the channel portfolio as well as foreign exchange denominated payments to content providers and for transponder costs (~50% of DTV’s costs), while DBN losses widened to Rs. 385mn due to increased depreciation and finance costs.

A QoQ comparison of 4QCY16 financials reflects the negative impact of a re-introduction of VAT during the quarter. Mobile voice revenues contracted by 1% QoQ, amid a 4% QoQ contraction in blended MOU. Consequently, increased contribution from lower margin hubbing and device revenues (mainly iPhone 7 sales), coupled with higher bad debt provisioning, contributed to a 4% QoQ EBITDA decline for the quarter. We also believe the seasonal effect may have somewhat mitigated the negative impact to voice MOU during the quarter and have therefore factored in a lower MOU for 1QCY17. On the fixed LTE side, market share gains in the home broadband segment were reflected in QoQ revenue growth of 15%, however management noted a customer downgrade to lower rental packages to adjust for the wallet hit from VAT charges.

We project full year earnings of Rs. 6.5bn for CY17 (-28% YoY). Introduction of 1) the proposed SIM activation tax; and 2) an increase in the telco levy on data to 25% (to align with voice telco levy) w.e.f April 2017 are expected to negatively impact revenues, while capex spend should increase to ~30% of revenues - on the back of increasing 4G fibre rollout - which could require an increase in balance sheet leverage and result in negative free cash flow for the year. The expected increase in leverage should also result in higher interest costs as DIAL pays 8.5% interest on LKR debt vs. 2.6% on its old dollar debt. At its current price of Rs.10.90, DIAL trades at a CY17E P/E of 13.7x, at a premium to the market.