Background

Dialog Axiata PLC was formerly known as Dialog Telekom PLC changed its name in July 2010. Dialog Axiata, a subsidiary of Axiata Group Berhad (Axiata), was incorporated in 1993 and is based in Colombo, Sri Lanka. It is one of Sri Lanka’s largest and fastest growing mobile telecommunications network. Dialog is also one of the largest listed companies on the Colombo stock exchange in terms of market capitalization carrying a market capitalization value of Rs.109Bn and a market price per share of Rs. 13.50. It continues to maintain its market leading position with a subscriber base of 11.8Mn at the end of 2016.

After an analysis of the company’s historical data, current and future performance and prospects it is recommended for a potential investor to BUY shares of the company. Although the market price of the shares has fallen by 1.87% and thus resulting in a fall in the price earnings ratio Dialog has successfully recovered from previous drops in the earnings. Moreover the fall in share price is comparatively lower than the fall in 2015. This could be because of the additional taxes and levies introduced by the new government which took charge in January 2015. Refer annexure 1 for detailed figures.

Key Reasons to support the recommendation

  • Financial stability and growth- Dialog is one of the leading telecommunication service provider’s in Sri Lanka. As per the Chairman’s report Dialog remitted a total of Rs. 31.7Bn to the Sri Lankan government in the form of direct and indirect taxes. Despite the tight competition in the telecommunication industry there has been continuous growth in revenue over the years. Further, revenue is expected to grow in the future. Moreover, the operational costs have risen however; these are in line with the increase in revenue. Overall the company experienced a 36% increase in the EBIT. Further Dialog maintains an average liquidity position. Refer annexure 3 for detailed figures.
  • Return on shares – Every investment decision ultimately depends on the returns. The return on shares includes capital gains and dividends. The share prices dropped in 2015 however, this could be due to the political instability in the country. The future share price is expected to increase based on the estimate calculated using the CAGR. Moreover, the share prices have risen to Rs. 12.10 the quarter ended September 2017. The company paid dividends of Rs. 0.39 per share; this represented about 35% of the 2016 net profit. The dividends paid to shareholders rose sharply in 2015 and has continued to increase in 2016 too. Thus, ensuring its investors a good return.
  • Innovation and competitive advantage – Dialog being one of the leading telecommunication service providers’ in Sri Lanka and in the South Asian Region was the first to introduce the 4G network in Sri Lanka hence creating a competitive advantage over the other service providers. Moreover, Dialog won the ‘People’s chosen leader in information communication technology’ for the 6th consecutive time. This gives Dialog a competitive advantage over the other service providers.

Key risks affecting the recommendation

  • One of the major risks which affect the telecommunication industry is the government taxes and levies. These taxes and levies could adversely affect the profitability of the company given that it is the market leader with the highest number of subscribers. Moreover, the 2018 budget introduced a Cellular Tower Levy of Rs. 200,000 per month for every new tower. This might directly hit the profits of Dialog.
  • Financial risk – Dialog has had significant gearing ratios throughout the last 5 years. Debt is a cheaper source of finance hence this could be the reason as to why gearing is high. However, high levels of debt could mean that the company has very high committed costs (finance costs) and a slight increase in the economy’s interest rates could prove to be disastrous. The finance cost is almost 4 times higher than the finance cost in 2014.
  • Exchange rate risks – Dialog operates on a global scale hence increasing its dependence on foreign dealers. This would result in exchange rate risks. Especially since the Sri Lankan rupee drastically depreciates.
  • Fall in demand of the group products – Dialog serves the nations demand for mobile, fixed, broadband and digital television services. However, the demand for fixed line services is likely to be outdated hence resulting in a fall in the demand. Moreover, other service providers already provide many of the services which Dialog provides.

SWOT Analysis

Strengths

  • Dialog was the first telecommunication service provider to introduce the 3G and 4G LTE connection in the whole of the South Asian region. Dialog is constantly ahead of its competitors in terms of innovation.
  • It is the market leader in the telecommunication industry hence giving it a competitive advantage over the other service providers. This creates a natural barrier of entry because of the large loyal subscriber base.
  • The board of directors consists of well experienced individuals who have a vast level of knowledge and skills. These could be contributed to the continuous success of Dialog. Moreover, the return of the CEO Mr. Weerasinghe with senior leadership experience from across the Asian region will only increase the strengths of the company.

Weaknesses

  • Dialog mobile networks lose signal quite often in comparison to other service providers. This can be annoying and frustrating to the users and hence they may shift to other service providers. Moreover, the lack of attention to this problem may be due to the increase in size of the group hence resulting in a limited time spent on core activities.
  • Certain Dialog services are expensive in comparison to other service providers.

Opportunities

  • Dialog can take over growing telecommunication service providers because of its strong brand and financial power. Hence reducing the competitions and ensuring they remain the market leader.
  • There is a growing trend towards using more than one sim card. Dialog could grow with its existing customers rather than new customers which can be expensive. Moreover the increase use of tablets and iPads adds to the growing trend of using more than one sim card.

Threats

  • The telecommunication industry is highly competitive and hence the chance of another service provider being the market leader is high. Moreover, given that other service providers introduce similar services to Dialog at a cheaper rate increases this risk further.
  • The government introduced additional taxes and levies on the telecommunication industry in the 2018 budget.

Valuation

Net asset price per share

The company can expect the net asset share price to be at Rs. 7.28. This was calculated using past records and the compound annual growth rate. However, since Dialog has a significant brand name and other intangible assets the share price could be undervalued if this valuation method is used. Refer annexure 2 for detailed figures.

PE Ratio

The share prices of Dialog rose till 2015 and fell thereafter this could be due to the political instability during the period. However, the estimated market price is expected to increase in 2017. The price target was calculated using the compound annual growth rate and the past performance. However, these estimates could be affected because of the introduction of the new government taxes and levies. The estimated price target is Rs. 11.10. Refer annexure 1 for detailed figures.

Conclusion

Based on my valuation Dialog Axiata PLC is expected to have a year-end share price of Rs. 11.10 (based on the PE ratio). I conclude with a strong buy recommendation in lieu of its financial strength and strong growth potential.

Annexures

Annexure 1 – Key Investor Indicators

20122013201420152016CAGR (%)2017 (Estimate)
EPS 0.760.650.760.641.1110%1.22
% Change-14%17%-16%73%
PE Ratio 11.0713.8217.5016.729.46-4%9.10
% Change25%27%-4%-43%
MPS 8.309.0013.3010.7010.5011.10
% Change8%48%-20%-2%

Annexure 2 – Key Investor Indicator (Net asset price per share)

 20122013201420152016CAGR (%)2017 (Estimates)
Net asset price per share (Rs) 4.574.885.55.816.639.7%7.28

Annexure 3 – Key Financial Indicators

Year20122013201420152016
Revenue56,345,45863,297,59167,285,59473,929,85586,745,233
Revenue Growth (%)12 %6%9%17%
Operating Profit6,801,1777,663,9578,053,7889,496,77912,915,206
Operating Profit Growth12%5%17%36%
NPAT6,030,1875,201,0306,097,7505,187,3269,026,395
NPAT Growth-13%17%-14%74%
Finance Cost2,727,1121,306,489615,9612,759,0102,363,340
Gearing (D/E)67%74%67%54%63%
Current Ratio (Times)0.540.420.650.550.55