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JKSB Quarterly Highlights_Dialog Axiata PLC (DIAL)_3QCY16

Note Summary:

DIAL reported a significant 317% YoY increase in profit for 3QCY16, with substantial non cash forex translational losses of Rs. 1.4bn in 3QCY15 (stemming from a ~6% QoQ depreciation in the LKR relative to the USD during the quarter) skewing the YoY comparison. On a normalised basis, 3QCY16 profit grew 34% YoY, supported by healthy topline growth (+16% YoY) and EBITDA margin expansion stemming from 1) monthly cost savings of Rs. 80mn-Rs. 100mn arising from the newly commissioned BBG cable; and 2) a reversal of bad debt provisioning on recovery of outstanding balances from foreign operators.

With 9MCY16 earnings having exceeded our projections, we have now revised our full year earnings forecast to Rs. 10.0bn, with an expected QoQ dip in 4Q revenue stemming from reinstatement of VAT charges coupled with an upward revision of the telecommunication levy on data. Looking ahead to CY17, we expect capex intensity to 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. Reinstatement of VAT charges should, in our view, be positive to DIAL from a cash flow perspective due to claiming of input VAT on capex, while it is too early to assess the EBITDA impact which would depend on customer elasticity. A pro-consolidation budget requiring 1) 80% 3G coverage by June 2018; and 2) an increase in annual spectrum license fees, could catalyse M&A activity aimed at acquiring additional spectrum (please refer to our Aug 2016 report for spectrum allocation bands by operator). At its current price of Rs. 10.40, DIAL trades at a CY16E P/E of 8.4x, at discount to the market.