- Dialog Axiata (Dialog) recently won the bid for Sri Lanka’s 4G licence. This is the first 4G licence (10Mhz in the 1800 Mhz frequency band) in Sri Lanka (and South Asia). Dialog out- bid two others in winning the 4G licence (Mobitel and Etisalat). Dialog is the largest celco in Sri Lanka, i.e. 55% revenue share. The top two largest players in Sri Lanka (2nd largest is Mobitel) account for up to 80% share of the Sri Lankan cellular market. Dialog contributes c.5% to Axiata group earnings and 6% to our SOP valuation.

- Sri Lanka entails a population of c.21mil and per capita income of USD5,582 (a small and lower income market relative to other markets Axiata is in). Mobile penetration rate is 91% (Malaysia: 133%). However, the market is experiencing robust data growth: Dialog FY12 data growth was at 53% vs. XL Axiata 50% and Celcom at 17%. Meanwhile, mobile subs growth has expanded by 8-fold in just 6 years, though this came at the expense of pricing; down 40% in 2010-2011.

- Dialog’s bid (for the 4G licence) of USD25m (RM78mil) is a lot higher vs. the reserve price of USD8mil. The licence implies a cost of c.RM3.7 per capita (Malaysia 4G licence: RM0.7 per capita). However, Malaysia is not a direct comparison as the licence was issued on apparatus assignment basis, which entails annual fees on top of the one-off licence fee (c.RM20m). Nonetheless, given that this is the first and only 4G licence in Sri Lanka currently, Dialog is positioned well ahead of competitors in rolling out its 4G network. Furthermore, Dialog’s 4G licence enables it to operate on the 1,800 Mhz spectrum, which entails much better propagation quality compared to the 2.6Ghz spectrum that Malaysian operators are using for 4G.

- No change to our capex projections in the meantime. Management has previously guided for a 14% rise in Dialog’s capex, i.e. from RM396mil (FY12) to RM450mil (FY13F). Dialog yesterday set up a Sukuk facility of up to RM1.2bil for future capex, working capital and refinancing of existing debt. While we view the developments positively, we do not expect a massive rollout as the ecosystem is not entirely ready for 4G yet given the lack of devices.

- No change to our BUY call and fair value of RM6.90/share. Key catalysts: (1) Progressively higher dividends; (2) Acquisitive growth, particularly in overcrowded markets, e.g. Indonesia, India, Cambodia. A key risk, however, is expensive valuations for new acquisitions. Axiata has a ready credit line of USD1.5bil to tap on should M&A opportunities arise.

Source: AmeSecurties