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Key Highlights:-

With 1Q2011 results coming below our expectations, we are downgrading ou

recommendation from Overweight to Neutral.

In our previous report - dated : 9thMarch 2011, We saidWe expect usage to increase furt

during FYE 2011, leading to a further rise in revenues though RPM will come off a little in 2H

with the expected reduction in the floor rate. We have revised our forecast in line with the

performance, and expectations of an increase in usage are less than earlier. We believe tha

future results are more likely to reflect 1Q11s performance, and EBITDA Margins be lower.

Our overall FCFE valuation is now at Rs. 11.00 compared to Rs. 12.00 before.

Rising inflation will prevent any more increases in EBITDA margins while the impac

on disposable income could reduce the growth rate in MoU. In our profit forecas

we have taken into account the impact of the accelerated depreciation on WIMAX

We put an Overweight recommendation on Dialog on the 17th

of August 2009 at

price of Rs5.25 when the ASPI was at 2500.46. While the stock price has almos

doubled since that point, the counter has underperformed the overall market sinc

our recommendation.

NEUTRAL

Analyst

Kareem Noordeen

Market Statistics as at 24th

May 2011

e Price Rs. 10.10

Low Rs. 6.75

High Rs. 13.80

ket Cap Rs. 82.25 Bn

es in issue 8,143 Mn

es held by public 14.73%

7431.97

6857.61

DIALOG AXIATA PLC 25th May 2

Dialog Telekom PLC (Group)- Earnings Model

2008 2009 2010 2011E 2012E

Turnover 36,277,664 35,774,145 41,422,783 44,703,821 47,925,559

Growth rate % -1.4% 16% 8% 7%

EBITDA 7,887,000 7,853,000 15,080,000 14,529,371 15,690,291

EBITDA Margin 21.7% 22.0% 36% 33% 33%

Profit for the period (3,593,550) (13,066,982) 5,047,441 4,742,388 6,289,439

Margins & EPS 2008 2009 2010E 2011E 2012E

NP Margin -10% -37% 12% 11% 13%

EPS Basic (0.35) (1.50) 0.62 0.58 0.77

-50%

0%

50%

100%

150%

200%

250%

ASPI Vs Dialog Share Price MovementDialog Share Price ASPI

0

100

200

300

400

500

600

7 /2 1/ 20 10 9 /2 1/ 20 10 1 1/ 21 /2 01 0 1 /2 1/ 20 11 3 /2 1/ 20 11 5 /2 1/ 20 11

RsMn

Previous months Price & Turnover Graph

T ur no ve r D ia lo g S ha re P ri ce

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EBITDA Performance & Forecast update

Company

Company EBITDA for the 1Q11 d

8%QoQ, a fall in 3 percentage

33% to Rs.3, 301Mn.

A bad debt reversal in the 4th

increased regulatory costs (inc

frequency costs & cess

irrecoverable VAT expenses an

sales promotion for the 1st

Quar

the key reasons for the EBITDA m

the mobile business to decline

1Q11.

The quarter under review also witnessed a 17%YoY increase in operating costs (excluding deprec

International origination costs and domestic interconnection charges increased in line with the growth in rev

With intense competition, aggressive expansion of the companys network infrastructure resulted in a

increase of network cost, increasing total network cost by 18%YoY. As a result of these events, EBITDA

arrived below our expections of 36-37%,

In our previous report - dated : 9th

March 2011, We saidWe expect usage to increase further during FYE 20

leading to a further rise in revenues though RPM will come off a little in 2H 2011 with the expected reduction

floor rate. We have revised our forecast in line with the 1Q11 performance, and believe that future results

more likely to reflect 1Q11s performance. We believe an EBITDA margin of 33% would be sustainable for th

future.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Miion

E BIT DA E BIT DA Ma rg in

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011E 2012E 2013E

Rs.Million

EB ITDA EBITDA margi n

have revised our forecast in line

h the 1Q11 performance, and

eve that future results are more

ly to reflect 1Q11s performance,

nything more than an EBITDA

rgin of 40% would seem

ustainable in the current market

ditions.

believe an EBITDA margin of

% would be sustainable for the

r future.

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(600)

(400)

(200)

-

200

400

600

800

1,000

2007 2008 2009 2010 2011E 2012E 2013E

Millions

D B N -EBITDA

Subsidiaries

DBN EBITDA increased by 2

to Rs. 145Mn. DBNs EBITDis currently at 25%, the incr

was mainly driven by the co

rescaling initiatives implem

during the FY 2010, reducin

operating and direct costs.

DTV EBITDA declined by

37%QoQ to Rs. 131Mn due to a

one off reversal in 4Q10. DTVs

EBITDA Margin is currently at

23%.

Group

With the mobile business reporting an EBITDA Margin of 33%, it is difficult for the group to report anything

significantly more than this, as the above subsidiaries contribute less than 10% to group EBITDA. (Currently

Thus, we expect EBITDA margin for the FY 2011 and for the forth coming years to stabilize at 33%.

(800)

(600)

(400)

(200)

-

200

400

600

800

1,000

1,200

2007 2008 2009 2010 2011E 2012E 2013E

Millions

D T V - EBITDA

BITDA margin for the 1Q10

as reported at 33% - down

4 Percentage Points

mpared to the previous

arter.

(2.00)

(1.50)

(1.00)

(0.50)

-

0.50

1.00

1.50

2.00

2006 2007 2008 2009 2010 2011E 2012E 2013E

Rs.

EPS basic EBITDA Margin

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Revenue & Net Profit Forecast

Company

Company Revenue growth increased by

13%YOY and slightly increased by 1%QoQ to

Rs. 10.03Bn for the 1Q11. With the revised

tariff rates, ARPU increased marginally to

305 while Minutes of use increased by

1%QoQ to 148 minutes.

With a modest 1%QoQ increase in company

revenue for the 1Q11, we do not expect revenue to increase significantly in the future as rising inflation will

a significant increase in ARPU while the impact on disposable income could reduce the growth rate in MoU.

.Although DIAL would be the prime beneficiary of the re-introduction of the interconnection charge of 50 cen

out going minute and 15 cents per SMS, we expect a revenue growth rate of 6-8% for the forth coming years

Subscriber Base

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

1 Q0 7 2 Q0 7 3 Q0 7 4 Q0 7 1 Q0 8 2 Q0 8 3 Q0 8 4 Q0 8 1 Q0 9 2 Q0 9 3 Q0 9 4 Q0 9 1 Q1 0 2 Q1 0 3 Q1

Mou QoQ % A RP U QoQ %

-

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010 2011E 2012E 2013E

RS.

Billion Turnover - Company

e Companys customer base

rpassed 7.01Mn increasing by

%QoQ.

-

1

2

3

4

5

6

7

8

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Millions

Total Subscribers Growth YoY

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Subsidiaries

,

Profitability

We mentioned in our previous report : dated 9th

March 2011 : the fact the minutes of use increased only fro

to 147 for the 4Q 2010, and with Wimaxs accelerated depreciation, leading to higher depreciation charges-

have revised down our forecasts With only a marginal increase of minutes of use to 148 minutes, we have f

revised down our forecasts in line with the performance of 1Q11.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011E 2012E 2013E

ons D B N - Turnover

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011E 2012E 2013E

Millions D T V- Turnover

Ns reported turnover declined

arginally by 1%QoQ to Rs.

4Mn, whilst CDMA & Broadband

bscribers increased to 198,000.

Vs reported turnover increased

12%QoQ to Rs. 561Mn.

tal Pay TV subscribers increased

181,000, adding 13,000 new

bscribers.

(15)

(10)

(5)

-

5

10

15

2006 2007 2008 2009 2010 2011E 2012E 2013E

Rs.

Billion

Group - Net Profit

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Forecast Summary

Dialog Telekom PLC (Group)- Earnings Model2008 2009 2010 2011E 2012E

Turnover 36,277,664 35,774,145 41,422,783 44,703,821 47,925,559 51,8

Growth rate % -1.4% 16% 8% 7%

EBITDA 7,887,000 7,853,000 15,080,000 14,529,371 15,690,291 16,7

EBITDA Margin 21.7% 22.0% 36% 33% 33%

Profit for the period (3,593,550) (13,066,982) 5,047,441 4,742,388 6,289,439 9,0Margins & EPS 2008 2009 2010E 2011E 2012E

NP Margin -10% -37% 12% 11% 13%

EPS Basic (0.35) (1.50) 0.62 0.58 0.77

Dialog Telekom PLC (Group)- Earnings Model

2008 2009 2010 2011E 2012E

Turnover 36,277,664 35,774,145 41,422,783 45,013,569 49,006,276 53,8

Growth rate % -1.4% 16% 9% 9%

EBITDA 7,887,000 7,853,000 15,080,000 16,436,754 17,400,617 19,1

EBITDA Margin 21.7% 22.0% 36% 37% 36%

Profit for the period (3,593,550) (12,913,598) 5,047,441 5,747,801 7,126,009 10,7

Margins & EPS 2008 2009 2010E 2011E 2012E

NP Margin -10% -36% 12% 13% 15%

EPS Basic (0.35) (1.50) 0.62 0.71 0.88

Revised Forecast

Forecast as at 9th

March

2011:

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Current valuation on Dialog

Taking into account recent results and discussions with the management, we have made so

adjustments to our forecasts. Our overall FCFE valuation is now at Rs.11.00. Our valuation

report issued on the 9th

of March 2011 at Rs. 12.00.

Our recommendation to downgrade Dialog Axiata Plc, also considered Dialogs EV/EBITDAcurre

ranges close to 7 times; this is considerably higher than its regional peers that have an EV/ EBITDA

about 5 times.

FCFE Sensitive Table at Rs. 11.00

9th

March 2011, FCFE Sensitivity Table: at Rs. 12.00

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Appendices

Summary: Recaps of Previous Reports.

Summary: Report issued on 9thMarch 2011FCFE Valuation at Rs. 12.00

When we issued our previous report on 9th

March 2011 we said ;

With 4Q2010 results coming below our expectations, we have revised down our forecast for 20

quarter results showed that other direct cost (including international origination costs and ou

roaming cost) had increased by 41%QoQ. This increased total direct costs by 3%QoQ, as oppos

revenue increase of 2%QoQ for the recent quarter.

We expect Company EBITDA margin of 38% compared to our previous forecast of a 40% EBIT

margin.

Even though the valuation per share has declined by Rs 2.00, we are maintaining our Overwei

position on the counter, as unlike most counters which are trading well above their fair val

Dialogs valuation is still somewhat above its current market price.

Summary: Report issued on 18th

November 2010FCFE valuation at Rs. 14.00


November 2010 we said ;

Taking into account recent results and discussions with the management, we have made some adjustment

forecasts. However, our overall FCFE valuation remains the same at Rs. 14.00.

For the 9ME-2010, GroupEBITDA margins were recorded at 37%. We expect EBITDA margins to be in line

overall 9 months performance, as both DBN and DTV have continued to contribute positively. We expect

margins to increase further for the FY 2011, and thereafter stabilize at around 35%. This assumption is base

group investing in further capital expenditure to keep up with new available technology.


August 2010FCFE valuation at Rs. 14.00

When we issued our previous report on 26

th

August 2010 we said :

EBITDA Margins for the 1Q and 2Q were 34% and 38% respectively. We expect 2H 2010 EBITDA to be in l

with 2Q 2010 performance, as both DBN and DTV are now contributing positively. As we expect this trend

continue, we expect the company to reach an EBITDA margin of 41%

Our new target price on Dialog, based on our multi stage FCFF valuation is Rs.14.00 compared to Rs15.00pr

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July 2010Dialog now moving into Harvesting stage from an Investing St


July 2010 we said:

In our report published on 6th

October 2009,

we developed a mobile telephony life cycle

for Dialog based on the free cash flow

margins generated by the operator. This is

based on a framework for analyzing Mobile

Telecom Profitability in some emerging

markets that was developed by Citigroup

Research.

The free cash flow margin that is the basis

for this analytical framework is defined as

EBITDA less CAPEX divided by Net Revenue. The life cycle essentially has four stages namely easy

Investment, Harvest and Maturity.

As Dialog shows the main features of the harvesting stage, a slowdown in customer growth rate, a fall

intensity and improvements in Free Cash Flow margins, we thus believe Dialog has moved out of the investi

and is entering in to harvesting stage.

Summary:Report in 2007 when we issued a Strongly Underweight recommendation on DIAL.

When we issued a Strongly Underweight recommendation on Dialog in February 2007 when the stock p

Rs28, it was taking a forward view of developments in 2009. Now in 2009 we are looking forward to 201

basis for our overweight recommendation. In February 2007, we looked forward to 2009 and said.

2009 a particularly bad year for core mobile profit growth

Our preliminary projections indicate that 2009 could be a particularly bad year for profit growth in the core mobi

operations of Dialog, on account of the interplay of all the factors detailed above. With the country hitting the 40%

penetration point growth, subscriber growth would be very dependent on handset costing and willingness of operators

subsidise immediate handset costing of the incremental subscribers. ARPU in real terms of any additional subscribers at th

point will be low. Pressure on pricing will be most acute as at that point with new subscriber growth tapering off.

We believe the four players in the market will turn to other markets to generate growth, possibly heralding the advent destructive pricing practises. Inflation trends could however remain strong and lead to costs growing at a faster clip tha

revenues, and could result in falling EBITDA margins in that year. The depreciation and interest cost of the capex made

2007 and 2008 which would to some extent continue into 2009 and continue to be a dampener on profits in core mobi

operations.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0E 2 01 1E 2 01 2E 2 01 3E 2 01 4E 2 01 5E

Mobile Telephony Life Cycle

Free Cash Flow Margin (FCF)

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With regard to its DCF Value at that time in Feb 2007 we said,

DCF Value in the longer term

The rising risk factor and inflation are now being reflected in rising risk free rate in Sri Lanka. Compared to the past whe

very low interest rates significantly pushed up valuations of growth companies like Dialog, in the new economic scenario

higher interest rates there is a particular effect on the fundamental valuation of a growth company such as Dialog. Wit

Dialog market value of equity well in excess of the book value of equity, the WACC of Dialog would also be very close to th

equity discount rate. With rising political risk (instability), Sri Lankan investors would also tend to want to work with

higher equity risk premium. Balance of Payment(s) concerns and a high depreciation trend would increase the discoun

factor for a foreign investor who builds a discount rate from a foreign discount rate. And the overall impact of all of this

that, our DCF based valuations of Dialog indicates that Dialogs current share price is not attractive, as positive cash flow

arise only in the longer term.

Furthermore, for Dialog in particular, the terminal value dominates even in an eight year DCF. At later stages another ri

factor is that Dialog, when it is generating strong positive cash flows, could be a very attractive target for taxation, from

state (country) that has shown a tendency to tax sectors that seem to generate very high levels of absolute cash flows. Th

BOI agreements would appear to provide Dialog protection from much taxation risk as well as the ability to switch to

favourable turnover based tax regime in later years. However in the light of the past actions of the state with regard to issu

such as LIOC, sector specific Super taxation of the banking system, the introduction of Economic Service charges even

the tax free BOI sector, we believe future taxation risk is very real.

We therefore told investors to,

At a broad level we believe an investment choice in Dialog is very dependent on whether investors believ

Dialog will repeat its success as a later entrant in the mobile industry, in these other segments. Dialog has th

management team that can replicate such success, but specific visibility on execution and competitor respons

is limited. Till such visibility on these businesses is clearer we believe investors should take a strong

underweight position on Dialog. This is particularly so as the market does not take into account the potentia

regulatory and tax impacts to Dialog in the longer term, which are more likely to impact Dialog negativel

than positively.

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The analyst responsible for producing the report does not work for Capital Alliance Securities (Private) Ltd. This report has been produced as part

of an outsourced research relationship with Frontier Research (Pvt0 Ltd a specialized research company engaged by Capital Alliance Securities

(Private) Ltd. This document has been prepared and issued on the basis of publicly available information, internally developed data and other

sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions

and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as

an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision

regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be

suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees, outsourced research providers

associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses,

outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a

result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by

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