Highlights

Dialog Axiata announced that its wholly-owned subsidiary, Dialog Broadband Network (DBN) has completed the acquisition of Sky Television and Radio Network (Sky).

Under the SPA, DBN to acquire the entire equity stake in Sky for a total consideration of LKR800m (RM18.9m). Upon completion of the SPA, steps will be taken to amalgamate Sky with DBN.

The objective of the acquisition was justified based on the spectrum assets currently under Sky’s possession in the 2.3GHz spectrum band assigned by the Sri Lanka’s telecommunication regulator, TRCSL, for the provision of pay TV services.

DBN added that Sky’s spectrum is complementary to its existing 15MHz block of 2.3GHz frequency which was used to launch TD-LTE fixed broadband services in Dec 2012.

The additional spectrum capacity would enable DBN to expand its fixed LTE service by offering higher broadband uplink and downlink throughput with better quality

The acquisition will be undertaken wholly in cash which will be funded through internally generated funds. Financial Impact

Making comparison in the absence of Sky’s detailed financial health, the price tag appears to be cheap compared to the tender win of 10MHz in the 1,800MHz band for SLR3.2bn (RM78.1m) back in March.

We believe that Axiata has no issue in funding it with its huge cash pile of RM7.9bn as of end of FY12.

Comments

We are positive on this new development as it strengthens Dialog’s product portfolio and value proposition of being the one-stop integrated telco in Sri Lanka.

No regulatory concern as TRCSL has approved the acquisition and merger with DBN along with spectrum ownership transfer. Dialog also added that TRCSL has granted the re-deployment of the spectrum for expansion purpose.

Catalysts

• Higher smartphone penetration boosting data ARPU.
• Strong growth in low penetration developing markets.
• More cost savings from collaboration with DiGi.

Risks

• Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

• Unchanged.

Rating

HOLD, TP: RM6.63

• Positives – Despite the challenging environment, Axiata’s main OpCo (Celcom, XL, Dialog) continue to execute well.
• Negatives – Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation

• Reiterate HOLD call on the stock based on unchanged SOP-derived TP of RM6.63

Source: Hong Leong Investment Bank Research - 15 May 2013