Fitch’s outlook for the Sri Lankan telco sector is stable and Fitch expect 2020 Funds From Operations (FFO) adjusted net leverage for SLT and mobile leader Dialog Axiata PLC (AAA(lka)/Stable), to remain stable at around 1.7x (2019F: 1.7x).
“We forecast average cash flow from operations for SLT and Dialog to improve to around Rs. 32 billion in 2020 (2019F: Rs.28 billion), and for revenue and EBIDTA to rise by 5%-6% and 8%-10%, respectively (2019F: 5% and 10%).
The average operating EBITDAR margin should stay stable at around 34% (2019F: 34%), driven by improving economies of scale in the data and home-broadband segments - offsetting the negative effect of a changing revenue mix.
SLT’s unconstrained standalone credit profile is stronger than that of the government of Sri Lanka, reflecting the company’s market leadership in fixed-line services and second-largest position in mobile, along with its ownership of an extensive optical-fibre network.
The standalone profile is also underpinned by its mid-single-digit percentage growth prospects, moderate estimated 2019 FFO adjusted net leverage of 2.1x, and stable operating EBITDAR margin.
SLT has lower exposure to the crowded mobile market and more diverse service platforms than mobile-market leader Dialog. However, Dialog has a larger revenue base, significantly better operating EBITDAR margin, lower forecast FFO adjusted net leverage and a better FCF profile than SLT.
Commenting on Data-Driven Growth Fitch says that they expect revenue to grow by a mid-single-digit percentage during 2019-2020 (barring any tax shocks), driven by data and fixed-broadband growth.
“We expect 4G smartphone penetrations to improve from the current 25% with the proliferation of cheaper Chinese phones.
Revenue rose strongly by 7.5% in 2018, driven by fixed-broadband and mobile usage after a temporary usage slump in 2017 due to higher taxes on voice and data. We expect the government’s recent announcement to reduce tax on telecommunication tariffs by 25% to support top-line growth.”
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