Dialog has sufficient headroom for debt-funded acquisition: Fitch

While affirming Dialog Axiata’s ‘AAA(lka)/Stable’ rating, Fitch Ratings yesterday said the market leading telco has sufficient headroom to undertake a debt-funded acquisition of a smaller operator.

However, Fitch said any rating action would depend on the acquisition price, funding structure, and the financial and operating profile of the combined entity.

Sri Lanka will soon have four telecos in operation, down from five, following the recent announcement of amalgamation of operations between Hutch and Etisalat. The merger is pending regulatory approval. 

Fitch said the announced merger is likely to relieve some competitive pressures that have undermined telecom companies’ revenue and EBITDA growth in recent years. Meanwhile, the rating agency said Dialog is in a position to gain revenue market share from smaller telcos, given its superior execution and mobile networks.

Fitch also said they expect Dialog’s operating EBITDAR margin to remain stable as larger economies of scale in the data segment offset falling profitability in the voice and text segments.
“Strong data growth is supported by proliferation of smartphones; over 80 percent of new handsets activated on Dialog’s network are 4G-enabled,” Fitch said.

Further, Fitch expects Dialog’s capex/revenue to be around 28 to 30 percent to expand the 4G networks and optical fibre infrastructure during 2019-2020.

“We believe that Dialog could receive support from its 83 percent-parent, Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken,” Fitch said. 
The rating agency maintains a Stable outlook on Sri Lanka’s telco sector.