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JKSB Sri Lanka Quarterly Highlights_Dialog Axiata PLC (DIAL)_3QCY17

DIAL reported a strong 31% YoY increase in Group earnings for 3QCY17, underpinned by topline growth (+11% YoY) coupled with EBITDA margin expansion (+3.3ppt YoY) supported partially by cost savings initiatives (which resulted in a 3.3ppt YoY improvement in DIAL’s cost to revenue ratio for the quarter). At a subsidiary level, DTV reported a slight narrowing of net loss YoY to Rs. 106mn for the quarter, on the back of a 12% YoY revenue increase and strong EBITDA margin expansion (+5.8ppt YoY), while DBN was NPAT positive (Rs. 640mn) for a third consecutive quarter supported by strong topline growth (+31% YoY) - stemming from continued strong take-up of the company’s home broadband offering - and EBITDA margin expansion (+20.1 ppt YoY). DIAL acquired an 80.34% stake in Colombo Trust Finance PLC (CTF) during the quarter, in order for DIAL to acquire a license to launch digital banking services targeting the unbanked/under banked and SME segments, with an initial ticket size of Rs. 100k. Management is looking at offering more high frequency lending than the conventional finance sector and is looking at ramping up to a Rs. 5bn loan book by 2020. Thereafter DIAL would look for partners (ideally of the Alibaba type or even banks) to further scale up the business and take the burden off DIAL’s balance sheet.

We have now upgraded our full year earnings forecast for CY17 to Rs. 11.0bn (+22% YoY), given two consecutive quarters of revenue recovery and cost rescaling benefits (YTD cost savings stand at Rs. 2.5bn). Further, with an expected removal of the short term 10% bonus data grant in the current quarter, the full benefit of removal of the 10% telecom levy on data - resulting in data services (mobile & fixed broadband) now being taxed at 19.74% vs. 31.7% previously - should be reflected in data revenue growth going forward. Following our earnings upgrade, DIAL now trades at a relatively attractive CY17E P/E of 9.7x at its current price of Rs.13.10, at a discount to our coverage universe P/E. A 2018 budget proposal to impose a Rs.200,000 monthly tax on mobile towers could have a significant negative impact on mobile operators if implemented (DIAL currently owns 2,000 towers out of a total of ~5,000 towers in SL), while a levy of 25 cents per SMS on bulk SMS advertisements should have an immaterial impact on DIAL’s bottom line as per management.