Corporates Telecommunications / Sri Lanka Dialog Axiata PLC 24 May 2018 1 Dialog Axiata PLC Rating Type Rating Outlook Last Rating Action National Long-Term Rating AAA(lka) Stable Affirmed 04 April 2018 Click here for full list of ratings Financial Summary (LKRm) Dec 2016 Dec 2017 Dec 2018F Dec 2019F Gross Revenue 86,745 94,169 102,229 112,255 Operating EBITDAR Margin (%) 35.4 37.8 37.3 36.9 FFO Margin (%) 31.2 33.7 32.0 31.2 FFO Fixed Charge Coverage (x) 9.3 10.1 9.0 8.5 FFO Adjusted Net Leverage (x) 1.2 1.1 1.2 1.1 Source: Fitch Click here to enter text. Key Rating Drivers Market-Leading Position: Dialog Axiata PLC's standalone credit profile of 'AAA(lka)' is underpinned by its market leadership in the growing mobile and pay-TV industry segments in Sri Lanka. We believe Dialog is in a position to gain revenue market share from smaller telcos with its superior 3G/4G networks. It has a solid financial profile with revenue growth of 8%-9%, stable operating EBITDAR margin of 35%-37%, and Fitch Ratings has forecast a low FFO-adjusted net leverage of 1.2x for 2018. High Ratings Headroom: We believe Dialog would receive support from its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken. Dialog and its parent continue to have moderate linkages, which include sharing key management personnel, a common name and common creditors, which could result in reputational risk to Axiata should Dialog fail. Unaffected by CTF’s Acquisition: Dialog's rating is unaffected by the LKR1.3 billion acquisition of Colombo Trust Finance PLC (CTF), a small non-bank financial institution, completed in November 2017. Dialog is likely to use CTF to expand its digital financial services strategy and supplement its payment settlement platform. It will likely inject LKR2.1 billion of equity in CTF over 2018-2020 to meet minimum regulatory capital requirements of LKR2.5 billion by January 2021. We believe that CTF's capital structure is likely to be strong enough and will not be a cash drain on Dialog during 2018-2021. We have fully deconsolidated CTF's debt (mainly deposits) and EBITDA from Dialog in our analysis. Proposed Taxes Credit Negative: Fitch believes that Dialog's operating EBITDAR margin could narrow to 31%-33% (2017: 38%) and its FFO adjusted net leverage could deteriorate to 1.4x-1.6x (2017: 1.1x) if it were to pay an additional LKR4 billion-6 billion in taxes for its mobile towers, as proposed by the government. However, we believe there is a high level of uncertainty about the implementation of the taxes and we have not therefore factored these into our base case. Nevertheless, we would expect Dialog's ratings to remain unaffected, even if the taxes were implemented, given the high ratings headroom. The Sri Lankan government's 2018 budget, announced on 9 November 2017, proposes to tax mobile operators LKR200,000 per tower each month.
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Dialog Axiata PLC · Dialog Axiata PLC 24 May 2018 5 Key Rating Issues Proposed Telecom Tower Tax Could Cut Margins, But Unlikely to be Implemented The government’s proposal to
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Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 1
Dialog Axiata PLC
Rating Type Rating Outlook Last Rating Action
National Long-Term Rating AAA(lka) Stable Affirmed 04 April 2018
Click here for full list of ratings
Financial Summary
(LKRm) Dec 2016 Dec 2017 Dec 2018F Dec 2019F
Gross Revenue 86,745 94,169 102,229 112,255
Operating EBITDAR Margin (%) 35.4 37.8 37.3 36.9
FFO Margin (%) 31.2 33.7 32.0 31.2
FFO Fixed Charge Coverage (x) 9.3 10.1 9.0 8.5
FFO Adjusted Net Leverage (x) 1.2 1.1 1.2 1.1
Source: Fitch
Click here to enter text.
Key Rating Drivers
Market-Leading Position: Dialog Axiata PLC's standalone credit profile of 'AAA(lka)' is underpinned by its market
leadership in the growing mobile and pay-TV industry segments in Sri Lanka. We believe Dialog is in a position to gain
revenue market share from smaller telcos with its superior 3G/4G networks. It has a solid financial profile with revenue
growth of 8%-9%, stable operating EBITDAR margin of 35%-37%, and Fitch Ratings has forecast a low FFO-adjusted net
leverage of 1.2x for 2018.
High Ratings Headroom: We believe Dialog would receive support from its 83%-parent, Axiata Group Berhad (Axiata) of
Malaysia, if its standalone credit profile were to weaken. Dialog and its parent continue to have moderate linkages, which
include sharing key management personnel, a common name and common creditors, which could result in reputational
risk to Axiata should Dialog fail.
Unaffected by CTF’s Acquisition: Dialog's rating is unaffected by the LKR1.3 billion acquisition of Colombo Trust
Finance PLC (CTF), a small non-bank financial institution, completed in November 2017. Dialog is likely to use CTF to
expand its digital financial services strategy and supplement its payment settlement platform. It will likely inject LKR2.1
billion of equity in CTF over 2018-2020 to meet minimum regulatory capital requirements of LKR2.5 billion by January
2021. We believe that CTF's capital structure is likely to be strong enough and will not be a cash drain on Dialog during
2018-2021. We have fully deconsolidated CTF's debt (mainly deposits) and EBITDA from Dialog in our analysis.
Proposed Taxes Credit Negative: Fitch believes that Dialog's operating EBITDAR margin could narrow to 31%-33%
(2017: 38%) and its FFO adjusted net leverage could deteriorate to 1.4x-1.6x (2017: 1.1x) if it were to pay an additional
LKR4 billion-6 billion in taxes for its mobile towers, as proposed by the government. However, we believe there is a high
level of uncertainty about the implementation of the taxes and we have not therefore factored these into our base case.
Nevertheless, we would expect Dialog's ratings to remain unaffected, even if the taxes were implemented, given the high
ratings headroom.
The Sri Lankan government's 2018 budget, announced on 9 November 2017, proposes to tax mobile operators
LKR200,000 per tower each month.
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 2
High-Single-Digit Revenue Growth: We expect Dialog's revenue to grow by 8%-10% (2017: 8.6%) during 2018-2019,
driven by data services revenue growth of 30%-35% (2017: 39%) and supported by the removal of the 25% telco levy on
data services in September 2017. We believe that data services' revenue contribution to consolidated revenue will rise to
over 25% in 2018 (2017: 21%).
Stable Profitability: Excluding the proposed tower taxes, we forecast Dialog's operating EBITDAR margin to remain
stable at 35%-37% as larger economies of scale in the data segment will offset falling profitability from the voice and text
segments. Strong data growth is supported by the proliferation of smartphones, with over half of new smartphones
activated on Dialog's network being 4G-enabled.
Negative FCF on Large Capex: We forecast Dialog to have negative free cash flow during 2018-2019 as cash flow from
operations will fall short of Dialog's large, ongoing capex plan and dividend commitments. Dialog will continue to invest
about 28%-30% of its revenue in capex each year to expand its 4G networks and its optical fibre infrastructure. We
expect annual dividends to increase to around LKR3.7 billion-4.3 billion (2017: LKR3.2 billion) during 2018-2019.
Consolidation to Relieve Competition: We believe the recently announced merger between Hutchison
Telecommunications Lanka (Pvt) Ltd and Etisalat Lanka (Pvt) Ltd is likely to relieve some competitive pressures that have
undermined telcos' revenue and EBITDA growth in recent years. The long-overdue industry consolidation is likely to
provide some relief from pricing pressure, especially in the data segment, where telcos have not been able to fully
capture the strong growth in data traffic.
Ratings Headroom for M&A: Dialog's ratings have sufficient headroom for the company to undertake a debt-funded
acquisition of remaining smaller operator Bharti Airtel Limited's (BBB-/Stable) Sri Lankan subsidiary, Airtel Lanka.
However, any rating action will be based on the acquisition price, funding structure, and the financial and operating profile
of the combined entity.
Rating Derivation Relative to Peers
Rating Derivation versus Peers
Peer Comparison Dialog's business risk profile is stronger than that of similarly rated national peers, given its market-leading position in Sri Lanka's mobile industry, stable cash generation, and integrated service offerings. Dialog has a larger revenue base and better operating EBITDAR margin than the fixed-line market leader, SLT, but this is offset by Dialog's higher exposure to the crowded mobile market. Dialog has a larger operating scale compared with hard-liquor market leader Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Rating Watch Negative), given the fragmented nature of the alcoholic beverage industry. DIST is also exposed to more regulatory risk in the form of recurrent increases in indirect taxation, but these risks are counterbalanced by its substantially stronger FCF. Dialog has a larger operating scale and a wider operating EBITDAR margin than Hemas Holdings PLC (AA-(lka)/Stable), which is a diversified conglomerate with exposure to pharmaceuticals, fast-moving consumer goods, leisure and transport. Hemas is the largest private pharmaceuticals distributor in the country and second-largest home care and personal care manufacturer. Hemas's FFO adjusted net leverage is likely to be similar to that of Dialog over the medium term.
Parent/Subsidiary Linkage The relationship between Axiata and Dialog is one of a ‘strong parent, weaker subsidiary and moderate linkages’. We believe that if Dialog’s standalone credit profile were to weaken, it would receive parental support given moderate linkages between the two entities. The operational linkage includes shared key management personnel, corporate name and creditors, which could inflict reputational risk on Axiata should Dialog fail.
Country Ceiling No Country Ceiling constraint was in effect for these ratings.
Operating Environment No Operating Environment influence was in effect for these ratings.
Other Factors Not applicable
Source: Fitch
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 3
Rating Sensitivities
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
– There is no scope for an upgrade as Dialog is at the highest rating on the Sri Lankan National Ratings scale.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
– FFO-adjusted net leverage above 3.5x, provided there is no further strengthening of rating linkages with the parent,
Axiata.
Liquidity and Debt Structure
Solid Liquidity: At end-2017, Dialog had sufficient unrestricted cash balance of LKR5 billion and undrawn committed
bank facilities of LKR14 billion to pay for its short-term debt maturities of about LKR6 billion. Dialog has strong access to
local banks, being among the largest corporates in Sri Lanka. Debt consists mainly of a USD149 million syndicated facility
and LKR10 billion bank loan.
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 4
Debt Maturities and Liquidity at end-2017
Liquidity Summary Original Original
31 December 2016 31 December 2017
(LKRm)
Total Cash & Cash Equivalentsª 6,410 5,043
Short-Term Investments
Less: Not Readily Available Cash and Cash Equivalents -868 -488
Fitch-defined Readily Available Cash and Cash Equivalents 5,542 4,555
Availability under Committed Lines of Credit due 2022 19,461 13,596
Total Debt with Equity Credit/Operating EBITDA (x)
1.1 1.2 1.1 1.0 1.0 1.0
FFO Adjusted Leverage (x) 1.5 1.5 1.3 1.3 1.3 1.3
FFO Adjusted Net Leverage (x)
1.2 1.2 1.1 1.2 1.1 1.1
How to Interpret the Forecast Presented
The forecast presented is based on the agency’s internally produced, conservative rating case forecast. It does not represent the forecast of the rated issuer. The forecast set out above is only one component used by Fitch to assign a rating or determine a rating outlook, and the information in the forecast reflects material but not exhaustive elements of Fitch’s rating assumptions for the issuer’s financial performance. As such, it cannot be used to establish a rating, and it should not be relied on for that purpose. Fitch’s forecasts are constructed using a proprietary internal forecasting tool, which employs Fitch’s own assumptions on operating and financial performance that may not reflect the assumptions that you would make. Fitch’s own definitions of financial terms such as EBITDA, debt or free cash flow may differ from your own such definitions. Fitch may be granted access, from time to time, to confidential information on certain elements of the issuer’s forward planning. Certain elements of such information may be omitted from this forecast, even where they are included in Fitch’s own internal deliberations, where Fitch, at its sole discretion, considers the data may be potentially sensitive in a commercial, legal or regulatory context. The forecast (as with the entirety of this report) is produced strictly subject to the disclaimers set out at the end of this report. Fitch may update the forecast in future reports but assumes no responsibility to do so.
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 9
Dialog Axiata PLC
EBITDAa - LKR27,001m
USD149m 1st Lien Secured Term Loan due 2023
LKR10,000m 1st Lien Secured Term Loan due 2021
Telecard (Private) Limited
Communiq Broadband
Network (Private) Limited
Digital Health (Private) Limited70% Digital Commerce Lanka
*EBITDA/R after Dividends to Associates and M inorities
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 13
FX Screener
Forex risk is mitigated through Dialog’s US dollar receipts, which are about 12% of its revenue (around USD72 million),
provided by international inbound traffic and outbound roaming businesses. However, the company is exposed to some
forex risk as 70% of its term debt (USD149 million) is in US dollars.
Covenant Summary
Dialog’s debt covenants include limits on net debt/EBITDA and net debt/equity. Debt levels were well below the set limits
at end-2017, and we expect both metrics to improve over the forecast period.
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
-80-60-40-20
020406080
100120
Total debthard FC and
LC composition
Total cash Net debtand (cash)
Total saleshard FC and
LCcomposition
Total costshard FC and
LCcomposition
EBITDA
(% of revenues)
Hard FC short-term (LHS) Hard FC ˃1 year (LHS) Local currency short-term (LHS)Local currency ˃1 year (LHS) Current debt/EBITDA (RHS) FX stress debt/EBITDA (RHS)Current debt/FFO (RHS) FX stress debt/FFO (RHS)
Fitch FX Screener(Dialog Axiata PLC — AAA(lka)/Stable, 31 Decemer 2017)
(x)
Source: Fitch
Corporates
Telecommunications / Sri Lanka
Dialog Axiata PLC
24 May 2018 14
Full List of Ratings
Rating Outlook Last Rating Action
Dialog Axiata PLC
National Long-Term Rating AAA(lka) Stable Affirmed 04 April 2018
Related Research & Criteria
Corporate Rating Criteria (March 2018)
National Scale Ratings Criteria (March 2017)
Parent and Subsidiary Rating Linkage (February 2018)
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and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of
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