Dialog Axiata’s financial recovery positions Group strongly to capture emerging growth opportunities
Dialog Axiata, Sri Lanka’s incumbent telecommunications industry market leader, has reported consolidated net profit of LKR 2.1 billion for the first half of 2010, a strong turnaround from the loss of LKR 9.5 billion recorded in the same period a year ago. More importantly, Dialog’s consolidated EBITDA (Earnings before Interest, Taxation, Depreciation and Ammortisation) has reached LKR 7.2 billion in the first half of the year (an increase of 80% from a year earlier) driving its EBITDA margin to 36% (from only 23% last year).
Strong recovery in Dialog’s quarterly financial performance LKR million
Source : Dialog Axiata PLC
Dialog has emerged leaner (following restructure of operations) and highly focused (on its core businesses of mobile telephony and mobile broadband internet services) from a period of severe macroeconomic and industry stress in 2008 and early 2009 (induced by the global credit crisis, the heightened level of conflict in the northern and eastern provinces of the country and a blind tariff war between telecoms operators) and is positioned to capture the inevitable upturn in demand for telecommunications services.
Core mobile telephony business has performed strongly. Underpinned by continued increase in its subscriber base and cost rationalisation, Dialog’s core mobile telephony business has posted EBITDA of LKR 7.1 billion in the first half of 2010, an increase of 67% over the previous year. Further, with interest costs falling on the twin impact of lower interest rates and reduced debt levels, net profit of the segment has surged to LKR 3.1 billion in the first half of 2010 in contrast to the loss of LKR 8.4 billion posted a year ago.
Fixed wireless and Fixed Broadband Internet operations continue to improve. Subsidiary, Dialog Broadband Networks (Private) Limited (DBN), which provides CDMA (Code Division Multiple Access) fixed wireless local loop (WLL) telephony services and Wi-Max (Worldwide Interoperability for Microwave Access) technology based broadband internet connectivity, has also recorded a 97% year-over-year improvement in EBITDA to a negative LKR 10 million in the first half of 2010. Improved profitability has been driven by higher broadband internet subscribers and cost rescaling. In particular, on a quarterly basis, DBN recorded positive EBITDA of LKR 33 million in the second quarter of 2010, the first time it has done so in seven similar periods.
Television business continues to grow. Dialog Television (Private) Limited (DTV), the satellite based direct-to-home pay television service, has also posted a year-over-year increase of 123% in EBITDA to LKR 54 million in the first half of 2010. This turnaround in profitability has been underpinned by robust growth in usage revenues, reorganisation of content bouquets and cost rescaling. Further, on a quarterly basis, DTV recorded positive EBITDA of LKR 30 million in the second quarter of 2010. This is the second successive quarter in which the company has posted positive EBITDA. This sustained positive EBITDA performance is particularly significant as DTV had been EBITDA negative from the date of acquisition.
Outlook for Dialog is significantly positive. With financial recovery taking hold, Dialog is well placed to gain from the emerging opportunities for growth following the end of the near three-decade long military conflict in the northern and eastern provinces of Sri Lanka in May 2009. In fact, it is for the first time in modern economic history of Sri Lanka that the country will be unhindered by adverse impact of war, providing significant scope for growth for corporate that have built dominant market positions.
Sri Lanka’s economic growth to accelerate. As has been the experience in countries that have emerged from a period of internal conflict to peace (such as Malaysia, Vietnam and Cambodia), Sri Lanka’s Gross Domestic Product (GDP) is expected to grow at over 7% per annum in real terms over the next five years. Economic expansion is likely to be driven by reconstruction, infrastructure development, revival in tourism/agriculture/fishery industries and most critically, the reintegration of the northern and eastern provinces (which account for one third of the country’s land mass, some 10% of the population and nearly two thirds of the coast line) with the mainstream economy.
Creditably, despite fighting a war that has consumed some 15% of Government revenue, Sri Lanka’s GDP has grown by an average of over 5.5% over the past two decades. And with defence spending likely to be utilised for productive purposes Sri Lanka’s economic growth may well exceed estimates.
Pre and post conflict economic growth rates of selected countries
Growth in Real GDP in US Dollar terms per annum
War Period
Post War
Source: Factiva, Global Insight, UNCTAD
Stable macroeconomic conditions to sustain growth. Importantly, the end of the war has also taken out much of the stress in the wider macroeconomic system in Sri Lanka, particularly with interest rates and inflation declining sharply and the external value of the Rupee remaining stable and even appreciating in the recent past. Consumer price inflation has declined from over 25% to around 6% currently, while benchmark Government twelve month Treasury Bill yields have fallen from over 20% to 9%. The Government Budget Deficit, which has averaged nearly 9% of GDP over the past two decades (largely on defence expenditure), is scheduled to fall below 5% in the next five years, contributing to sustained improvement in macroeconomic fundamentals. Low and stable interest rates and inflation and a steady currency will obviously contribute greatly to sustaining economic growth and business expansion and hence driving demand for telecommunication services in both voice and data segments.
Per Capita GDP to grow strongly. As economic growth accelerates, Per Capita GDP (which reached USD 2053 in 2009) is targeted to rise considerably over the next few years, driving demand for basic telephony services in general and mobile voice and data telecommunications in particular from households and individuals. Further, with inflation and interest rates being contained and the Sri Lanka Rupee likely to remain stable, household and personal disposable incomes are expected to rise significantly in the future enabling greater affordability of value added telecommunication, information (data) and entertainment (television/media) services, providing significant growth opportunities for telecommunications service providers.
Sri Lanka’s Per Capita GDP is set to grow strongly
US Dollars
Source : Central Bank of Sri Lanka
Telecoms industry to play crucial role in post conflict socio economic development. The telecommunications industry is obviously poised to play a critical and catalytic role in the post conflict economic growth of Sri Lanka.
High quality telecommunications services, particularly mobile telephony and broadband internet access are now prerequisites for promoting, accelerating and sustaining economic growth. In addition to being the most efficient mode of communication, modern telecommunications promotes economic activity by providing access to information and enhancing productivity/efficiency. In addition, telecommunication fosters social integration (even of distant rural communities) and has become a mode of delivering entertainment.
Northern and Eastern regions offer great opportunities. The normalisation of the northern and eastern provinces also offers considerable opportunity for telecoms companies to expand operations. Dialog was the first mobile telephony company to offer its services in the region way back in 2002. In fact, Dialog began providing mobile telephony services in the northern Jaffna peninsula within 90 days of the signing of the Cease-Fire Agreement between the Government and the LTTE in 2002. Further, following the end of the armed conflict in the northern and eastern provinces in May 2009, Dialog was the first Telco to expand operations in the region, doing so within 90 days and now even offers HSPA (High Speed Packet Access) technology based broadband internet access. The first mover advantage has enabled Dialog to maintain a market share of 80% in the region, which will place the company strongly to capture new subscriber numbers. The company now has 159 sites (with 300 base stations) in the northern and eastern provinces, investing some USD 10 million in 2009, and is likely to expand its footprint further.
Dialog with Quadruple bundle “Infotainment” offering ready to capture lion’s share of growth. Dialog offers the most user friendly quadruple bundle of telecommunications and infotainment services in the country and thus is well positioned to capture a major share of the emerging growth opportunities. The Dialog group now provides GSM (Global Standard for Mobile) mobile telephony, CDMA fixed wireless telephone services, HSPA mobile broadband internet connectivity, Wi-Max fixed wireless broadband internet access and satellite based pay television services.
In addition, Dialog also operates one of the most sophisticated telecommunications infrastructure networks in the country, offering access to other telecoms operators as well.
Room for growth in mobile telephony penetration. At the end of the first quarter of 2010, total telephone connections in Sri Lanka amounted to 18.509 million, of which mobile telephones accounted for some 81% or 15.043 million. Mobile telephony penetration was estimated at 72% as at end of the first quarter of 2010, up from a mere 0.5% in 1999. However, this number is deceptive as it is estimated that 30-35% of such activated SIM cards are used by one and the same individual, implying that actual/real mobile telephony penetration is much lower at around 47-50%. This leaves much room for further increase in mobile telephony penetration, especially at the lower end of the market, as economic growth accelerates and disposable incomes rise.
Of course, mobile telephony penetration in more developed countries such as Singapore and Hong Kong have risen to very high levels of 135% and 170% respectively, offering a view of the possible growth opportunities that accompany higher economic growth and Per Capita GDP.
Dialog, commanding a 45% share of activated SIM cards and a 57% share of industry revenue (at the end of the first quarter of 2010) leads the market. Dialog’s industry leadership has been achieved by its “inclusive” approach to the market, underpinned by very savvy marketing via innovative pricing, product/service offerings and technological innovation, which were judiciously combined to activate and dominate previously untapped market segments. These attributes will enable Dialog to capture a lion’s share of the emerging new demand for mobile telephone connections, especially at the lower end of the income pyramid.
Sri Lanka mobile telephony penetration
Source : Central Bank of Sri Lanka
Voice mobile telephony usage to increase with growing economic activity. Indications are that industry activity levels having plateaued in 2009, is now set to improve, underpinned by accelerating economic activity. Dialog claims that key industry measure of ‘Minutes of Usage’ (MoU) per subscriber per month has shown early signs of improving in the first quarter of 2010. Dialog’s MoU per subscriber per month has been rising steadily from 104 in the fourth quarter of 2008 to 129 in the third quarter of 2009, remaining at that level in the subsequent two quarters.
However, MoU have increased to 134 in the second quarter of 2010 and is projected to rise further as business activity continues to pickup. Further, on comparison of MoU of regional telecoms operators too, Sri Lanka has further headroom to show improvement.
Dialog has also built considerable voice and data transmission capacity by constructing a vast base station/infrastructure network, which provides mobile telephony service coverage of approximately 80% of the land mass of the country and 90% of the populated areas. This will enable the company to accommodate rising voice telephony usage levels as economic growth accelerates and Per Capita GDP levels increase.
Regional comparison of Minutes of Usage per Subscriber per Month
Minutes
Clear Headroom for Growth
Source : Dialog Axiata PLC
RPMs to rise with greater use of VAS. Dialog has also witnessed that underpinned by accelerating economic activity, ‘Revenue per Minute’ (RPM) of its mobile telephony services has bottomed out and begun to recover in the first quarter of 2010. Looking ahead, it is likely that strong economic expansion and hence rising Per Capita GDP, greater use of Value Added Services (VAS) and a likely switch from Prepaid to Post-paid telephony plans, would drive RPM higher.
Dialog’s Revenue per Minute has bottomed out
LKR per minute
Source : Dialog Axiata PLC
Decline in ARPU can ease with increasing demand for data services. The availability of cheaper mobile phones with greater functionality is also driving demand for data services and thus helping raise ARPU (Average Revenue Per User) for Dialog. Further, the growing use of smart phones such as the iPhone and Blackberry with sophisticated mobile browsers and e-mail capabilities is also leading more subscribers to add on high-value data plans to voice subscriptions, helping revive ARPUs further. In addition, development and deployment of mobile VAS, especially in the areas of mobile payments, funds transfer, trade and agricultural information services should also support ARPU revival.
Mobile broadband internet is the new growth area. As economic growth accelerates against the back drop of peace, demand for broadband internet access is expected to surge, from both the enterprise and household markets. In fact, Dialog’s mobile broadband subscribers have grown by 44% year-over-year in the first quarter of 2010, displaying rates of growth that were typical of the early days of the mobile telephony industry. Dialog estimates that the addressable market for broadband internet is around 330,000 currently and is expected to grow to 4.3 million over the next four years, underpinned by increasing computer ownership, greater availability of Smartphones and other access devices and of course declining connectivity costs. Of the estimated market size for broadband internet access, roughly half is forecast to be that for mobile connections. Dialog which has already built sophisticated Wi-Max and HSPA infrastructure is likely to benefit most from the anticipated surge in demand for broadband internet access.
Significant scope for monetising network infrastructure. Dialog has built a vast base station/infrastructure network that provides mobile telephony service coverage of over 80% of the land mass of the country and 90% of the populated areas. Dialog currently has close to 2,700 2G and 800 3G base stations, of which roughly 64% is shareable with other telecoms operators. In addition, Dialog is also building a 550 kilometre high capacity fibre optic network linking major towns and cities in the country to improve quality (in terms of speed and clarity) of both data and voice services. Going forward, Dialog plans to monetise this vast network infrastructure by offering capacity to other telecommunications service providers, enabling the group to recoup its capex much faster, thus facilitating continued investment in new/latest technology.
Growth in fixed wireless telephony/broadband internet to revive. Dialog’s CDMA technology based fixed wireless telephony and Wi-Max fixed wireless broadband internet services are also beginning to gain ground with revival in economic/business activity. Subsidiary Dialog Broadband Networks (Private) Limited (DBN), which offers these two services primarily for enterprise customers as a combined solution has also extended same to households, thus significantly expanding its addressable market size. At the end of the first quarter of 2010, DBN had 179,000 active CDMA fixed wireless telephony customers and over 7,000 Wi-Max Broadband Internet subscribers. Further, DBN has accelerated the depreciation of its network infrastructure, which should assist in improving the company’s net profitability beyond 2012.
Strong potential in television entertainment market. Dialog’s satellite based television broadcasting subsidiary, Dialog Television (Private) Limited (DTV), which telecasts over 70 channels consisting of both international/regional and local content, with a current subscriber base of 160,000, which accounts for some 78% of the Pay TV market in Sri Lanka. Demand for Pay TV services is expected to grow rapidly as household disposable incomes rise in the years ahead, leading DTV into profitability.
Focused/targeted capex and healthy cash flows strengthen Balance Sheet. Dialog’s operating cash flow in the first half of 2010 totalled LKR 7.05 billion, a year-over-year increase of 43%. This healthy operating cash flow was augmented by very focused and clearly targeted capital expenditure, which has declined by 46% year-over-year to LKR 2.83 billion in the first half of 2010 following the completion of the extensive network modernisation programme in 2009.
In 2010, Dialog’s core mobile telephony capital expenditure will be focused on expanding next generation infrastructure centred on high speed mobile broadband internet, the optical fibre network and expansion and consolidation of the company’s coverage leadership in the recently liberated northern and eastern provinces of the country.
Dialog’s strong operating cash flow, combined with clearly targeted capital expenditure has enabled the group to generate positive free cash flow of LKR 4.32 billion in the first half of 2010 in contrast to the negative free cash flow of LKR 1.32 billion recorded in the corresponding period of 2009. The deployment of such free cash flow to repay debt has reduced group borrowings by 19% year-over-year, enabling the ratio of gross debt to EBITDA to improve to 1.86 times in the first half of 2010 from a high of 4.03 times in the previous year, signifying a clear trend towards the company achieving investment grade Balance Sheet benchmarks in the near term.
