Three Key Takeaways from Dialog Axiata’s 2018 First-Half Earnings

[wdps id=”1″]Sri Lanka (Insights Equity) – Dialog Axiata PLC (DIAL) posted LKR5.7 bn of net earnings for the first half of 2018, a 46 percent growth compared last year’s LKR3.9 bn for the same period, on the back of double-digit top line growth and improved margins.

Half-yearly revenue grew by 17% from the corresponding period last year to LKR52.7 bn as revenue from mobile operations and television operations improved by 15 and 21 percent respectively, despite revenue from fixed telephony/ broadband operations slowed to 21 percent.

Net profit margin improved to 11 percent for the first half of the year compared with 9 percent for the same period last year as EBITDA* margins in all three business segments improved.

Net Profit

  1. Revenue growth is fastest in one and half years

DIAL’s top line grew by 17 percent in the first half of the year, its fastest in one-and-half years, as revenue from mobile operations, which made up 80 percent of total revenue for the period, rose by 15 percent.

Bucking the stagnation, revenue from Pay-tv operations recorded an impressive growth of 21 percent for the period, its highest since the second half of 2015 as DIAL leveraged its advertising revenue through its online advertising portal adhub.lk.

However, revenue from fixed telephony/ broadband operations for the period edged up only 21 percent compared to 36 percent a year ago, its slowest in two years despite country’s favourable taxation on data, compared to heavily-taxed voice and pay television businesses.

Driven by improved data usage, DIAL’s quarterly blended ARPU** resumed growth trajectory with a 3 percent of growth compared to 2018 first quarter, despite shrinking blended MOU*** reflecting the country’s declining trend of international calls, which contracted by 25 percent for the year ended March 2018.

Revenue

Composition

  1. EBITDA margin improves amid highest EBITDA growth since 2016 second half

DIAL’s EBITDA growth for the first half of the year stands at 26 percent, its highest in a year; consequently, half-yearly EBITDA margins improved to 37 percent compared to the 34 percent of last year driven by revenue growth and cost management strategies.

Meanwhile, company appears to be transforming its sales and marketing strategy, as distribution costs, where marketing and advertising expenses are included, have been only 13 percent of total revenue for the period, its lowest since 2012 first half and with a decline of 1 percent, distribution costs contracted for the second consecutive period.

Hence, net profit margin for the period stands at 11 percent compared to 9 percent of the corresponding period last year.

EBITDA

  1. DIAL’s capital expenditure continues to cool off

With LKR11.1 bn of capital expenditure for the first half of the year, DIAL’s capex is slowing down around mid-single digit levels growing at 6 percent for the first six months of the year in comparison to 49 percent growth recorded for the same period last year.

Hence, capital intensity (capital expenditure to revenue ratio) has declined to 21 percent, its lowest level in one and half years, as DIAL’s mobile 4G PoP (Point-of-Presence) coverage exceeds 50 percent and fixed LTE PoP coverage remains at 55 percent.

Capex

Outlook

With a 0.68x of mid-year gearing level, a significant increase since last year end’s 0.59x, and 64 percent of this debt being denominated in USD as per 2017 annual report data, DIAL is exposed to the depreciation of LKR against USD which has been 4.5 percent to-date.

Moreover, the loss from LKR depreciation against USD for the first six months of 2018 is estimated to be LKR751 mn compared to LKR536 mn for the same period last year; hence the normalized growth of profit after tax adjusted for both the forex loss and adoption of SLFRS 15 accounting standard stands at 41 percent for the period.

Meanwhile, in the medium term, a possible implementation of the amended telco tower levy of LKR200,000 per annum from next year will not significantly impact DIAL’s bottom line as the levy could amount to approximately LKR540 mn or 5 percent of DIAL’s 2017 net profit, assuming DIAL owns 2,200 towers and another 1,000 towers are shared with a tenancy ratio of 2.

*EBITDA – Earnings before Interest, Tax and Depreciation
**ARPU – Average Revenue Per User
***MoU – Minutes of Use
Sources:
DIAL Financials 
Data from Telecommunication and Regulatory Commission of Sri Lanka
– Analysis by Dulan Lokuwithana
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