Sri Lanka's Dialog Axiata retains AAA(lka) Fitch rating

ECONOMYNEXT – Sri Lanka's Dialog Axiata has retained its AAA(lka)'/Stable Fitch rating given its market leadership in the growing mobile and pay-TV industry segments and strong growth in data services revenue, expected to exceed a quarter of total sales.

Fitch Ratings said in a statement Dialog is in a position to gain revenue market share from smaller telcos, with its superior 3G/4G networks capability.

“It has a solid financial profile with a revenue growth of 8%-9%, stable operating EBITDAR margin of around 35%-37%, and low Fitch-forecast 2018 FFO adjusted net leverage of 1.2x.”

The full statement follows:

Fitch Ratings-Singapore/Colombo-04 April 2018: Fitch Ratings-Singapore/Colombo- 4 April 2018: Fitch Ratings has affirmed Sri Lanka-based telecom company Dialog Axiata PLC's National Long-Term Rating at 'AAA(lka)'. The Outlook is Stable.

KEY RATING DRIVERS

Market-Leading Position: Dialog's standalone credit profile of 'AAA(lka)' is underpinned by its market leadership in the growing mobile and pay-TV industry segments. We believe the company is in a position to gain revenue market share from smaller telcos, with its superior 3G/4G networks capability. It has a solid financial profile with a revenue growth of 8%-9%, stable operating EBITDAR margin of around 35%-37%, and low Fitch-forecast 2018 FFO adjusted net leverage of 1.2x.

High Ratings Headroom: We believe Dialog would receive support from its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken. Dialog and its parent continue to have moderate linkages, which include sharing key management personnel, a common name and common creditors, which could result in reputational risk to Axiata should Dialog fail.

Unaffected by CTF Acquisition: Dialog's rating is unaffected by the acquisition of Colombo Trust Finance PLC (CTF), a small non-bank financial institution, for LKR1.3 billion completed in November 2017. Dialog is likely to use it to expand its digital financial services strategy and supplement its payment settlement platform. Dialog is likely to infuse equity of LKR2.05 billion in CTF during 2018-2020 in order to meet an enhanced minimum regulatory capital requirement of LKR2.5 billion by 1 January 2021. CTF's capital structure should then be strong enough to prevent becoming a cash drain on Dialog over the rating horizon.

We have fully deconsolidated CTF's debt (which is mainly in the form of deposits) and EBITDA from Dialog in our analysis.

Proposed Taxes Credit Negative: Fitch believes that Dialog's 2018 operating EBITDAR margin could narrow to 31%-33% (2017: 38%) and its FFO adjusted net leverage could deteriorate to 1.4x-1.6x (2017: 1.1x) if it were to pay an additional LKR4 billion-6 billion taxes for its mobile towers as proposed by the government. However, we believe there is a high level of uncertainty about the implementation of the taxes and we have not therefore factored these into our base case. Nevertheless, we would expect Dialog's ratings to remain unaffected, even if the taxes were implemented, given the high ratings headroom.

The Sri Lankan government's 2018 budget, announced on 9 November 2017, proposes to tax mobile operators LKR200,000 per tower each month.

High-Single-Digit Revenue Growth: We expect Dialog's revenue to grow by 8%-9% (2017: 8.5%) during 2018-2019, driven by data services revenue growth of 30%-35% (2017: 39%) and supported by the removal of the 25% telco levy on data services in September 2017. We believe that data services' revenue contribution (2017: 21%) to consolidated revenue will rise to over 25% in 2018.

Stable Profitability: Barring proposed tower taxes, we forecast Dialog's operating EBITDAR margin to remain stable around 35%-37% as larger economies of scale in the data segment will support falling profitability on the voice and text segments. Strong data growth is supported by the proliferation of smartphones, with over half of new smartphones activated on Dialog's network being 4G-enabled.

Negative FCF on Large Capex: We forecast a small free cash flow (FCF) deficit during 2018-2019 as cash flow from operations will fall short of Dialog's large, ongoing capex plan and dividend commitments. The company will continue to invest about 28%-30% of its revenue in capex each year to expand its 4G networks and its optical fibre infrastructure. We expect dividends to increase to around LKR3.7 billion-LKR4.3 billion (2017: LKR3.2 billion) during 2018-2019.

Debt-Funded M&A: Some industry consolidation is likely, with ongoing intense competition in the mobile segment where smaller telcos are unprofitable and face high investment requirements. We believe Dialog and Sri Lanka Telecom PLC (SLT, B+/AAA(lka)/Stable) could acquire smaller telcos to strengthen their market position and consolidate spectrum assets. Dialog's ratings have sufficient headroom for a debt-funded acquisition of a smaller telco for around LKR10 billion-12 billion.

DERIVATION SUMMARY

Dialog's business risk profile is stronger than that of similarly rated national peers, given its market-leading position in Sri Lanka's mobile industry, stable cash generation, and integrated service offerings. Dialog has a larger revenue base and better operating EBITDAR margin than the fixed-line market leader, SLT, but this is offset by Dialog's higher exposure to the crowded mobile market.

Dialog has a larger operating scale compared with hard-liquor market leader Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Rating Watch Negative), given the fragmented nature of the alcoholic beverage industry. DIST is also exposed to more regulatory risk in the form of recurrent increases in indirect taxation, but these risks are counterbalanced by its substantially stronger FCF

Dialog has a larger operating scale and a wider operating EBITDAR margin than Hemas Holdings PLC (AA-(lka)/Stable), which is a diversified conglomerate with exposure to pharmaceuticals, fast-moving consumer goods, leisure and transport. Hemas is the largest private retail pharmaceuticals distributor in the country and second-largest home care and personal care manufacturer. Hemas's FFO adjusted net leverage is likely to be similar to that of Dialog over the medium term.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within the Rating Case Include:

- High-single-digit revenue growth during 2018-2019 (2017: 8.5%)
- Operating EBITDAR margin to remain stable at around 35%- 37% during 2018-2019 (2017:37.8%).
- Capex/revenue to remain high at around 28%-30% (2017: 32%).
- Dividend pay-out to increase to LKR3.7 billion-4.3 billion during 2018-2019 (2017: LKR3.2 billion)
- Proposed mobile tower taxes are not implemented.
- Deconsolidated CTF's financials from Dialog.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action Include:

- There is no scope for an upgrade as Dialog is at the highest rating on the Sri Lankan National Ratings scale

Developments That May, Individually or Collectively, Lead to Negative Rating Action Include:

- FFO adjusted net leverage above 3.5x, provided there is no further strengthening of rating linkages with the parent, Axiata.

LIQUIDITY

Solid Liquidity: At end-2017, Dialog had sufficient unrestricted cash balance of LKR7.9 billion and undrawn committed bank facilities of LKR13.6 billion to pay for its short-term debt maturities of about LKR11 billion. 

Dialog has strong access to local banks, being among the largest corporates in Sri Lanka. Debt consists mainly of a USD149 million syndicated facility and LKR10 billion bank loan.

Sri Lanka's Melsta Regal Finance rating watch revised after Fairfax take-over

ECONOMYNEXT - Fitch Ratings said an 'A+(lka)' rating of Sri Lanka's Melsta Regal Finance has been revised to 'evolving' from 'negative' after Fairfax Financial Holdings of Cananda said it was taking over the firm.

"The Rating Watch Evolving reflects the uncertainty of the announced acquisition's impact on MRF's rating," Fitch said.

"We believe Fairfax has the ability to provide extraordinary support to MRF if required, but there is a lack of clarity on the probability of support from Fairfax and MRF's importance to its new ultimate parent."

A Fairfax led consortium said it will pay 2.5 billion rupees to Melstacorp Plc, to buy 100 percent of Melta Regal Finance though Bluestone1 (Pvt) Ltd.

The full statement is reproduced below:

Fitch Revises Rating Watch on Melsta Regal Finance to Evolving from Negative
Fitch Ratings-Colombo-05 April 2018: Fitch Ratings has revised the Rating Watch on Melsta Regal Finance Ltd's (MRF) National Long-Term Rating of 'A+(lka)' to Evolving from Negative.

The rating action follows the announcement dated 2 April 2018 that a consortium led by Fairfax Financial Holdings Limited of Canada (Fairfax) will acquire 100% of the equity in Sri Lanka-based MRF from its current parent, Melstacorp PLC (MC) for LKR2.5 billion. Fairfax will be the single largest shareholder of MRF after the completion of the transaction with effective control of 70% of the company via Bluestone1 (Private) Limited, a special purpose vehicle established for the acquisition of MRF.

MRF's rating of 'A+(lka)' was driven by Fitch's expectation of support from the Melstacorp group through parent MC. However, Fitch believes that support from MC can no longer be relied upon.

KEY RATING DRIVERS

The Rating Watch Evolving reflects the uncertainty of the announced acquisition's impact on MRF's rating. We believe Fairfax has the ability to provide extraordinary support to MRF if required, but there is a lack of clarity on the probability of support from Fairfax and MRF's importance to its new ultimate parent.

MRF's rating will be reassessed in the event that support from Fairfax cannot be relied upon, and will be downgraded by multiple rating categories to its standalone level, which is materially weaker than the current support-driven National Long-Term Rating.

RATING SENSITIVITIES

MRF's rating could be upgraded if Fitch determines that Fairfax would be willing to provide extraordinary support to MRF, if required.

The National Long-Term Rating would most likely be downgraded, possibly to MRF's standalone profile, if the agency views that Fairfax's support cannot be relied upon. This is likely to see MRF downgraded to the 'B' category on the National Rating scale.

Sri Lanka listed firms seek Rs20bn in debt ahead of New Year

ECONOMYNEXT - Debt issues of up to 20 billion rupees of two state-controlled listed companies, Sri Lanka Telecom and People's Leasing and Finance, and private bank Nations Trust will open on 11 April two days prior to the Sinhala and Tamil New Year, the Colombo Stock Exchange said.

The stock exchange on Friday said it approved the three debenture issues which will be listed.

People's Leasing closed 10 cents lower at 15.70 rupees, Sri Lanka Telecom fell 20 cents to 26.90 rupees and Nations Trust fell 1 rupee to 80.20 rupees.

People's Leasing and Finance PLC, a unit of state-controlled People's Bank, is hoping to raise 6 billion rupees in debt capital.

The finance company offering 40 million listed, rated, unsecured, senior redeemable debentures at 100 each valued at 4 billion rupees.

If oversubscribed People's Leasing may offer a further 20 million debentures at the same price for 2 billion rupees.

The debentures are rated AA-(lka) by Fitch Ratings.

People's Bank's Investment Banking Unit is managing the issue.

State-controlled Sri Lanka Telecom's 7 billion rupee debenture issue rated AAA(lka) by Fitch also opens 11 April.

The telco is offering 50 million senior, unsecured, redeemable, rated debentures at 100 rupees each for 5 billion rupees.

If oversubscribed Sri Lanka Telecom may exercise an option to offer 20 million more debentures in two stages for 2 billion rupees.

Acuity Partners is managing the issue.

Private bank Nations Trust is offering 35 million debentures at 100 rupees each for 3.5 billion rupees, with an option to double the issue if oversubscribed which could see the bank raise 7 billion rupees.

Sri Lanka tourist arrivals up 24-pct in March, Chinese visitors down

ECONOMYNEXT – Tourist arrivals into Sri Lanka rose 24.1% to 233,382 in March 2018 from a year ago, despite violence against minority Moslems that prompted the government to impose a state of emergency and led to cancellations of hotel bookings.

The largest source market for tourists in March was India, followed by United Kingdom and Germany, with the number of visitors from China dropping, the Sri Lanka Tourism Development Authority said.

The island received 707,924 tourists up to 31st March 2018 this year, up 17.1% from last year with almost 94% of them coming by air and rest by sea.

Europe continued to be the largest regional source of tourist traffic to Sri Lanka with 53% of the total traffic received in March 2018, Asia and the Pacific accounting for 38 % of the total traffic, America 7%, Middle East 1% and Africa 1%.

India, United Kingdom, Germany, China and France were Sri Lanka’s top five international tourist generating markets in March this year.

India was the largest source of tourist traffic to Sri Lanka with 13% of the total traffic received in March 2018, and up 13% to 30,583 from last year.

The United Kingdom accounted for 13% of the total traffic, while Germany, China and France accounted for 11%, 9% and 6%.

Arrivals from China, which had been one of the fastest growing markets, fell by almost 5% in March 2018 to 21,101.

Sri Lankan stock index hits 11-week closing low ahead of holidays

Reuters: Sri Lankan share index on Monday touched its lowest close in 11 weeks, pulled down by blue-chips stocks in a moderate turnover, as many market participants were on leave ahead of the traditional Sinhala-Tamil New Year this week, brokers said.

The Colombo stock index ended 0.38 percent down at 6,431.10, its lowest close since Jan. 23.

The turnover stood at 679.7 million rupees ($4.37 million), below this year’s daily average of around 1.2 billion rupees.

Market sentiment has improved after Prime Minister Ranil Wickremesinghe survived a no-confidence motion last week, dealers said.

“The turnover was due to some block trade on three stocks. The market wants further direction on the political angle,” said Prashan Fernando, CEO, Acuity Stockbrokers.

“Even before we could observe much reaction to the no-confidence vote, we are going in for a long holiday.”

Ceylinco Insurance (non-voting), John Keells Holdings and Hemas Holdings, which were mainly traded via block deals, together accounted for around 88 percent of the day’s turnover.

Ceylinco Insurance ended 2 percent lower, John Keells closed 0.7 percent lower, Distilleries Company of Sri Lanka Plc ended 7.6 percent lower, and Hatton National Bank closed down 1 percent.

Diversified conglomerate Hemas Holdings ended 0.8 percent higher.

Foreign investors bought shares worth net 102.3 million rupees on Monday, but they have net sold 788.3 million rupees worth of equities.

Dealers expect the stock market to be tepid this week ahead of the Sinhala-Tamil New Year on April 14.

The central bank unexpectedly cut its key lending rate by 25 basis points on Wednesday, as policy makers sought to revitalise an economy growing at its weakest pace in 16 years and facing heightened political uncertainty.

The index fell 0.33 percent last week and dropped 1.14 percent in March.

($1 = 155.4500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez, Editing by Sherry Jacob-Phillips)