Dialog Axiata [DIAL.

N0000]
FASTER AND CHEAPER DATA - REITERATING A BUY
YEAR END DEC (LKR mn) Revenue EBIT Reported Profit EPS Reported EPS Growth YoY (%) DPS EPS Recurring PER (x) EV/EBITDA (x) Dividend Yield (%) 2011 45,637 6,218 5,354 0.65 9.4 0.25 0.65 13.6 5.1 2.8 2012A 56,345 6,801 6,030 0.75 15.3 0.33 0.88 11.8 4.8 3.7 2012E 56,500 7,900 6,900 0.87 33.8 0.33 0.91 10.8 3.4 4.0 2013E 64,000 10,400 8,100 1.01 16.1 0.44 1.01 8.8 3.8 5.0
Market Capitalization (USD): 555mn

Current Price (LKR) 8.9 2013E Target Price (LKR)

9.8
Recommendation

BUY
Date 20-Feb-13

DIALs 2012 recurring EPS is LKR 0.03 lower than CALs estimates. However, 2012 reported profit was c.LKR 900mn lower due to a one-time expense of c.LKR 900mn during 4Q2012. Nevertheless, management has opted to increase payout to 45% from 38%, thereby maintaining CALs 2012E LKR 0.33 DPS. We feel that this is a positive signal by management on its commitment to its shareholders, despite a rollercoaster ride in 2012. DIALs mobile subscriber base increased 9% YoY (maintaining a c.40% market share), while mobile BB subs increased c.7% YoY. CALs 2013E EPS is LKR 1.01 (+16% YoY), driven primarily by broadband penetration. Our revised 2013E target price is LKR 9.8 (+5%) and we expect a dividend yield of 5% for a one-year total return of c.15% - BUY

Market Capitalization (LKR): 71bn 6mos avg. Daily T/O (USD): 107k Free Float: 15%

Segmental Results Analysis (2011 vs. 2012) Dialog mobile posted LKR 49bn in revenue (+19% YoY), DBN posted LKR 4.2bn (+147% YoY) and DTV posted LKR 2.9bn (+26% YoY). DIAL group revenue was in-line with expectations, as was recurring profit. However, due to a c.LKR 900mn charge for legacy infrastructure modernization, DIALs reported EPS was LKR 0.12 lower than our estimates. Nevertheless, DPS of LKR 0.33 is in-line with CALs expectations. Broadband expected to drive profits in 2013E (+34% YoY) Mobile broadband penetration island wide stood at c.4.5% end-2012 (up from c.2.3% in 2011), while total internet subscriber penetration stood at c.6.5%. Due to the lack of fixed-line infrastructure and higher costs, CAL is confident that Sri Lanka mobile BB subs will grow c.+13% YoY to 1.1mn. DIAL should benefit with its dominant share of mobile subs (c.40%). Further, DIALs 4GLTE BB service (launched Jan 2013) is a much more competitive offering to SLTs ADSL service (c.LKR 1,300 more/month), which should result in a faster BB sub growth at DIAL. CAL is Reiterating a BUY on DIAL Our 2013E revenue is LKR 64bn (+14% YoY), leading to an EPS of LKR 1.01 (+15% YoY). CAL expects a total return of c.15% by end-2013, based on a target price of LKR 9.8 and a dividend yield of 5%.

CAL Securities
Level 5, Millennium House, No.46/58, Nawam Mawatha, Colombo 2 Tel: +94 11 231 7786 Email: purasisi@capitalalliance.lk

Purasisi Jinadasa

Refer p.5 for Important Disclaimer

Appendix 1 DIALs large mobile sub base to drive growth (2013E EPS +35% YoY)
Thousands 25,000 20,324 20,000 17,247 40% 15,000 33% 10,000 20% 5,000 200 2010 Sri Lanka Mobile Subs DIAL Mobile Subs (Market Share %)-RHS 2011 2012 2013E 2014E Sri Lanka Mobile BB Subs DIAL Mobile BB Subs (Market Share %)-RHS 485 942 1,067 1,120 0% 18,319 44% 39% 42% 39% 21,340 45% 39% 38% 40% 22,407 50% 50% 60%

30%

10%

CAL expects the introduction of 4GLTE BB service to spur growth in the BB segment. DIALs market share of mobile subs (39%) is likely to continue over the medium-term as technology and pricing of competitor products lag behind

Appendix 2 DIALs mobile BB users represent only c.5% of total DIAL mobile subs
Thousands 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2010 DIAL Mobile Subs 2011 2012 2013E 2014E DIAL Mobile BB Subs (% of total Subs)-RHS 2% 4% 6892 7,189 6% 5% 7,825 8,323 8,506 7% 8% 7% 6% 5% 4% 3% 2% 1% 0% In 2012, mobile BB penetration of DIAL subs stood at c.5%. CAL expects this to grow to 6% by end2013

Source: Company Reports, TRCSL and CAL Estimates

Appendix 3 DIALs 4GLTE vs. the rest (faster and cheaper)

Monthly Rental (LKR) 4490 DIALs 4GLTE (guaranteed speed of at least 4mbps) service is on average 2x cheaper than similar products at competitors CAL expects BB users to switch to DIALs service over the course of 2013
* The monthly rentals are for packages with a maximum usage of 20gb and does not include connection fees

3250 2690

1400

DIAL 4G

SLT ADSL

SLT HSPA+

Etisalat HSPA+

Appendix 4 Income Statement

YEAR END DEC (LKR mn)
Revenue Direct Costs Gross Margin Administration Costs Distribution Costs Others Operating Profit Net Finance (Cost)/Income Profit Before Tax Taxation Profit for the Year Recurring Profit EPS - Recurring EPS - Reported Dividend Yield Recurring PER (x)

2011
45,637 (25,114) 20,523 (8,055) (6,325) 75 6,218 (295) 5,932 (579) 5,354 5,354 0.65 0.65 2.8% 13.7

2012
56,345 (32,216) 24,129 (9,865) (7,601) 138 6,801 (2,727) 4,066 1,965 6,030 7,034 0.88 0.75 3.7% 10.1

CALs 2012E
56,489 (32,723) 23,766 (8,746) (7,131) 52 7,940 (2,692) 5,249 1,667 6,916 7,287 0.91 0.87 4.2% 8.8

2013E
64,043 (34,995) 29,049

2014E
73,443 (39,712) 33,732

9,341 (1,281) 8,060 8,060 1.01 1.01 5.0% 8.8

11,961 (1,469) 10,493 10,493 1.31 1.31 6.5% 6.8

Source: Company Reports and CAL Estimates

Appendix 5 Balance Sheet

2011 ASSETS Non-Current Assets PP&E Intangible Assets Others Current Assets Inventories Trade and Other Receivables Cash and Cash Equivalents TOTAL ASSETS EQUITY Capital and Reserves Stated Capital Retained Earnings Others LIABILITIES Non-Current Liabilities Borrowings Others Current Liabilities Trade and Other Payables Borrowings Others TOTAL EQUITY AND LIABILITIES 2012 2013E 2014E

51,131 3,869 87 405 10,281 10,452 76,227

59,064 10,386 278 284 12,022 8,647 90,680

63,444 12,015 31 324 17,497 10,564 103,874

67,824 12,266 31 483 22,238 5,989 108,832

28,056 6,668 (1,571)

28,104 10,737 (1,659)

28,104 15,270 (1,659)

28,104 21,171 (1,659)

17,018 4,101 15,837 6,055 64 76,227

12,094 2,384 26,164 12,833 24 90,680

10,764 2,271 30,100 19,000 24 103,874

8,000 2,206 35,987 15,000 24 108,832

Source: Company Reports and CAL Estimates

DISCLAIMER

This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

Contacts
Research Team
Tel No: +94 11 231 7777 (General) Email: teamresearch@capitalalliance.lk Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@capitalalliance.lk Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@capitalalliance.lk Reshan Wediwardane Email: reshan@capitalalliance.lk Dushan de Silva Email: dushan@capitalalliance.lk Thushani de Silva Email: thushani@capitalalliance.lk Ananya Udeshi Email: ananya@capitalliance.lk