DIAL’s 1H2012 recurring results are in-line with CAL’s year-end expectations*. DIAL’s mobile telco and broadband (BB) segments posted the strongest growth and CAL expects this to continue as mobile BB penetration accelerates. Island-wide mobile BB penetration increased from c.2% end-2011 to c.4% in Jun 2012, translating to c.5% at DIAL. However, due to lower than expected foreign income gains and the resultant higher than expected non-recurring translational loss on foreign denominated debt (c.LKR 865mn), 1H2012 EPS was LKR 0.07 lower. Nevertheless, CAL is maintaining a BUY, with an earnings-based 2013E target price of LKR 9.1 (+47%). Our DCF-based 2013E value is LKR 10.7 (+73%).
- Segmental Results Analysis (1H11 over 1H12)- DIAL’s 1H2012 recurring results are in-line with CAL’s full-year expectations. Dialog mobile posted LKR 23.7bn in revenue (+18% YoY), DBN posted LKR 1.9bn (+58% YoY) and DTV posted LKR 1.4bn (+27% YoY). Further, island-wide mobile BB penetration has doubled to c.4% since end-2011 and CAL estimates penetration within DIAL has increased to c.5% from c.2% in end-2011.
- Growth Driver- DIAL continues to hold c.39% share of mobile users, the faster rate at which mobile BB subs are growing (+57% Dec 2011-Jun 2012) should benefit the company (CAL’s 2012E island-wide mobile subs are c.1.1mn and in June 2012 subs were c.765k). CAL estimates that DIAL holds c.40% of the mobile BB market.
- FX Impact- CAL’s base case scenario was affected due to lower than expected USD denominated earnings, insufficient to offset the translational loss on USD denominated debt†. CAL’s 2Q2012 EPS forecast was LKR 0.07 higher as a result. Therefore, we have taken a more conservative view than before on the LKR/USD exchange rate (LKR 133 by 2012 YE and LKR 142 by 2013 YE), as well as on foreign currency earnings. This revision slightly lowers our 2013E DCF value from LKR 11.1 to LKR 10.7, which is still higher than the resulting earnings-based price target of LKR 9.1.
- CAL is Reiterating a BUY on DIAL- Our 2012E revenue is LKR 55.1bn (c.+21% YoY), leading to an EPS of LKR 0.32 (LKR 0.68 recurring). DIAL is trading at a 47% discount to CAL’s 2013E target of LKR 9.1.