Monday, 16 September 2013 00:15
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Fitch Ratings has affirmed Sri Lanka-based telecom company Dialog Axiata PLC’s (Dialog) ‘AAA(lka)’ National Long-Term rating. The Outlook is Stable.
Key rating drivers
Parent support: Dialog’s rating reflects Fitch’s expectations that its 83%-parent, Axiata Group Berhad of Malaysia (Axiata), is likely to provide support if required, given operational and strategic linkages between the companies. Linkages include a common brand name and common creditors which can result in reputation risk to Axiata if Dialog fails.
Support has been forthcoming from Axiata, both during the normal course of business and during periods of financial stress. In July 2013 Axiata provided deficiency support to Dialog for an off-shore syndicated bank facility of US$ 200 m which will help Dialog fund its ongoing capex at a lower cost. Axiata also provided a corporate guarantee on Dialog’s debt and a shareholder loan in 2009 when Dialog was under financial stress.
Strong standalone profile: Dialog is the market leader in domestic mobile telecommunications with a subscriber market share of 38% at end-March 2013. Dialog is one of two quad-play service providers domestically. Its market share in fixed line and broadband is evolving, but it is the leader in the paid TV segment. Fitch assesses Dialog’s standalone rating to be ‘AA+(lka)’ based on its low business risk profile relative to its domestic peers and the agency’s expectation that Dialog’s funds flow from operations net leverage will be below 1.75x over the medium-term (end-Q213: 2.0x).
High capex expected: Fitch expects Dialog’s capex to remain high at between 30% and 40% of projected revenue in 2013 and 2014, mostly for expanding its data capacity and quality. Part of Dialog’s capex will be spent on securing alternative access to international bandwidth through the Bay of Bengal submarine cable, which will be operational by end-2014, and will provide Dialog with cheaper access to the rest of the world. Fitch estimates that this could boost Dialog’s EBITDAR margins by up to 100bps, all else remaining equal. Dialog spent over Rs. 14 b in capex in H113, nearly half of which was for acquisitions of spectrum for launching fourth generation services.
Data growth pressure margins: Fitch estimates that data revenue will account for between 20% and 25% of Dialog’s mobile revenue in 2015, up from 10% in Q213 and 5% in Q211. However, data has lower margins than voice services and therefore Fitch expects that Dialog’s operating EBITDAR margins may reduce by about 50bp annually over the medium-term, but are likely to remain above 30%. Data revenue grew by over 60% year-over-year in Q213.
Satisfactory liquidity: In Q313 Dialog will refinance over 70% of its group debt, including most of its current maturities that were outstanding as at end-June 2013, using the US$ 200 m syndicated facility. The USD loan will have a two-year grace period on capital repayment which will benefit Dialog’s liquidity profile. Fitch expects that Dialog will generate negative free cash flow in 2013 and 2014 due to its significant capex. However, Dialog’s liquidity is supported by a strong credit profile and access to domestic bank funding. Dialog has sufficient foreign currency earnings to repay medium-term maturities of its USD debt.
Rating sensitivities
Negative: Future developments that may individually, or collectively, lead to a further negative rating action include: A material dilution in Axiata’s ownership or board control in Dialog, removal of the common brand name, or a weakening of the current strategic and operational ties between the companies
Positive: There is no scope for an upgrade as Dialog is at the highest rating on the Sri Lankan national scale.
