Fitch Ratings has affirmed Dialog Telekom's National Long-term rating at 'AAA(lka)'. The Outlook is Stable. Fitch has also affirmed the rating on Dialog's outstanding preference shares of LKR5 billion at 'AA+(lka)'.
In Fitch's view, Dialog's credit metrics are likely to weaken due to its proposed debt-funded expansion, intensifying competition among local mobile operators, and macroeconomic cost pressures. However, the affirmation is driven by the implied support deemed to be available from Dialog's largest shareholder, Telekom Malaysia International (TMI), which owns 83.15% of Dialog's equity. The rating also factors in Dialog's leading position in Sri Lanka's mobile telecommunication landscape at present, and its continued strong operating cash flow generation.
Dialog's contribution to TMI's regional earnings is material, albeit on a reducing trend due to more recent investments in TMI's portfolio, as well as the intensifying competition amongst local mobile operators. However, Fitch believes that TMI's commitment to Dialog should remain strong over the medium term given that Dialog is pioneering multiple service delivery platforms which should benefit TMI's strategy over the longer term. Fitch's sentiment is further justified by TMI's contribution of over LKR13.05bn or 84% of the total funds raised during Dialog's 2007 rights issue.
Dialog set in motion an aggressive network expansion and capacity building process in FY07 with over LKR25bn worth of investments being absorbed, driving its capital expenditure to a high of 77% of group revenue, compared to an average of around 48% for FY06 and FY05. However its credit metrics remained largely stable during FY07, underpinned by its rights issue of LKR15.5bn in June 2007. Consequently Dialog's net leverage, as measured by net adjusted debt to EBITDAR, improved marginally to 1.0x from 1.1x at FYE06. Dialog expects to invest a further USD450m over the three years ending FYE10 as part of this expansion plan, which is expected to be funded by debt to a large extent. This, together with Dialog's dividend distribution policy of around 40%-50% of net earnings will result in the company being substantially free cash flow negative over the medium term. Nearly 60% of the proposed investments have been allocated towards the improvement and expansion of mobile transmission infrastructure and towards increasing mobile subscriber capacity, with a further 11% allocated for the expansion of Dialog's optical fibre transmission network. While Fitch notes that the budgeted expansion of Dialog's operations could put it on a stronger footing compared to its competition over the longer term, the group's credit metrics will deteriorate materially over the medium term.
Competition among local mobile operators has intensified considerably over the last two years driven by aggressive network expansion which has resulted in Dialog's incremental subscriber growth lagging that of the industry for the first time in FY06 and FY07. Consequently, Dialog's market share fell to around 53% of total subscribers at FYE07, from 57% and 63% at FYE06 and FYE05, respectively. Group EBITDA margin deteriorated to around 43% at FYE07 from around 54% at FYE06, partly due to the drag created by Dialog's subsidiaries which are still in the early stages of development. Fitch observes that total contribution of subsidiary revenue to the group was relatively small at around 5% at FYE07. Fitch notes that Dialog's subsidiaries may find it challenging to break even at an EBITDA level over the short term. Fitch expects Dialog's mobile operations to continue to account for a significantly large portion of the group's earnings and cash flow generation over the medium term.
While the Outlook on the rating is Stable, Fitch notes that Dialog's rating could come under negative pressure over the medium term if its competitive position within the local mobile industry deteriorates considerably, and/or if it becomes reasonably clear that perceived support from TMI has waned.
Posted to the site on 5th May 2008
Posted to: www.cellular-news.com/story/30951.php