Saturday, 13 September 2014 01:26
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Fitch Ratings has affirmed Sri Lanka-based telecoms company Dialog Axiata PLC’s (Dialog) ‘AAA(lka)’ National Long-Term Rating. The Outlook is Stable. Key rating drivers are as follows:
Parent support: Dialog’s rating of ‘AAA(lka) includes a single notch uplift from its stand-alone credit profile based on Fitch’s assessment of strong operational and strategic linkages with its stronger 83%-parent, Axiata Group Berhad (Axiata) of Malaysia. Fitch believes that Axiata is likely to provide financial support, if required, to Dialog as it has in the past.
For example, in July 2013, Axiata provided deficiency support to Dialog for an off-shore syndicated bank facility of $ 200 m to fund Dialog’s capex at a lower cost. In 2009, Axiata provided a corporate guarantee on Dialog’s debt and a shareholder loan when Dialog was under financial stress. Other linkages include a common brand name and common creditors, which can result in reputation risk to Axiata should Dialog fail.
Resilient stand-alone profile: Fitch assesses Dialog’s stand-alone profile at ‘AA+(lka)’ given its market-leading position in Sri Lanka’s mobile and pay-TV industries, moderate funds flow from operations (FFO)-adjusted net leverage of below 2.0x and operating EBITDAR margin of over 30%.
Profitability could decline: Fitch expects 2014 revenue to rise by 5% driven by an increase in mobile data service revenue. However, we expect operating EPITDAR margin could fall by 50bps-100bps each year during 2014-17 (2013: 34.1%) due to changes in the revenue mix as low-margin data services replace higher margin voice and text revenue. However, profitability could be supported by an industry consolidation and regulatory tariff floor on data services.
Capex to raise leverage: Fitch expects FFO-adjusted net leverage to worsen to around 2.0x (2013: 1.8x) on continued large capex investments and tax payments as Dialog comes out of a tax holiday period. Fitch expects Dialog’s 2014 capex to be around 30% of revenue due to expansion of its 3G data networks. Dialog invested LKR28.3n, or 44% of revenue, in 2013, with about a quarter of it spent on acquisition of 4G spectrum.
Possible industry consolidation: The number of industry participants could reduce to three from five as Sri Lanka Telecom (BB-/Stable) announced in January 2014 that it was in preliminary negotiations to acquire Hutchison Lanka and third-largest operator Etisalat could acquire Bharti Airtel Limited’s (BBB-/Stable) unprofitable Sri Lanka subsidiary, Airtel Lanka, which is the fourth-largest operator. The regulatory tariff floor on voice services has prevented smaller operators from competing on price and has left them unviable in the medium term.
Rating sensitivities are as follows:
Negative: Future developments that may individually, or collectively, lead to 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.
