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Friday January 27th, 2023

Sri Lanka Telecom to connect million homes with fibre, rates low: Fitch

ECONOMYNEXT – Sri Lanka Telecom, the islands sole wireline operator is expecting to connect a million fibre optic customers in the next two years form current 70,000 despite low broadband tariffs, Fitch a rating agency said.

Fitch downgraded the outlook on SLT’s ‘AA+(lka)’ rating after the outlook on Sri Lanka’s sovereign rating was lowered.

SLT is expected to invest amounts equal to 28 to 30 percent of revenues on infrastructure on its 4G networks.

The full statement is reproduced below:

Fitch Revises Outlook on Sri Lanka Telecom to Negative; Affirms at ‘AA+(lka)’

23 DEC 2019 02:37 AM ET

Fitch Ratings – Singapore/Colombo – 23 December 2019:

Fitch Ratings has revised the Outlook on Sri Lanka Telecom PLC’s (SLT) National Long-Term Rating to Negative from Stable and affirmed the rating at ‘AA+(lka)’. We have also affirmed the National Ratings on SLT’s outstanding senior unsecured debentures at ‘AA+(lka)’.

The rating action follows Fitch’s revision of the Outlook on Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Negative from Stable (see, “Fitch Revises Outlook on Sri Lanka to Negative; Affirms at ‘B'”, (fitchratings.com/site/pr/10105494) dated 18 December 2019.)
KEY RATING DRIVERS

Strong State Linkages: SLT’s ratings are constrained by the sovereign as per Fitch’s Parent and Subsidiary Rating Linkage criteria. We assess the relationship between the sovereign and SLT as one of a weaker parent and stronger subsidiary with strong operational and strategic linkages. The state holds a majority stake in SLT directly and indirectly, and can exercise significant influence on its operating and financial profile. SLT’s second-biggest shareholder, Malaysia’s Usaha Tegas Sdn Bhd at 44.9%, has no special provisions in its shareholder agreement to dilute the government’s significant influence over SLT.

High Capex, Negative FCF: We expect SLT to have negative free cash flow (FCF) during 2019-2020 (2018 negative FCF of LKR3.4 billion), as cash flow from operations could be insufficient to fund capex requirements to expand the fibre infrastructure and 4G mobile networks. We expect SLT’s 2019 capex to remain high, at around 28%-30% of group revenue (2018: 26%), as it aims to complete its 4G population coverage to around 95% by end-2019. However, management expects its capex/revenue to drop to around 18%-20% in 2019.

We expect SLT to continue to invest in expanding fibre coverage as it aims to connect about one million homes by 2020-2021, from the 70,000 homes currently enabled. SLT would typically need to lay fibre for at least two million homes for half of the households to be connected. We expect SLT’s fibre investments to have low returns due to the country’s low broadband tariffs. Dividends are likely to remain around LKR1.6 billion-1.8 billion in the next two to three years.

Data-Driven Growth: We 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 penetration 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.

Further Consolidation Probable: We expect further consolidation, and believe that Airtel Lanka, a subsidiary of Bharti Airtel Limited (BBB-/Negative), may seek M&A due to mobile competition, higher taxes and high capex requirements. The recently concluded merger between Hutch and Etisalat may relieve some competitive pressures that have undermined telecom companies’ revenue and EBITDA growth in recent years.

Stable Sector Outlook: Fitch’s outlook for the Sri Lankan telco sector is stable as we expect 2020 mean 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 LKR32 billion in 2020 (2019F: LKR28 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.
DERIVATION SUMMARY

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.
KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Our Rating Case for the Issuer

– Revenue to increase by the mid-single-digit percentage, driven by fixed-broadband and mobile-data services in 2019-2020

– Capex/revenue to remain high at around 28%-30% as SLT expands its fibre and 3G/4G networks.

– Operating EBITDAR margin to remain stable at around 29%-30%.

– Effective tax rate of 28%.

– Dividend payout of LKR1.6 billion-1.8 billion
RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Stabilisation of the Outlook

A revision of the Sri Lankan sovereign’s Long-Term IDR Outlook to Stable from Negative would result in SLT’s National Long-Term Rating Outlook revised to Stable.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

A downgrade in the Sri Lankan sovereign’s Long-Term IDR would result in a downgrade on SLT’s National Long-Term Rating.

For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in the agency’s Ratings Action Commentary of 18 December 2019:

The main factors that individually, or collectively, could trigger a downgrade are:

– Failure to place the gross general government debt/GDP ratio on a downward path due to wider budget deficits or the crystallisation on the sovereign balance sheet of contingent liabilities that are linked to state-owned entities or government-guaranteed debt.

– Increase in external sovereign funding stresses that threaten the government’s ability to meet upcoming debt maturities, particularly in the event of a loss of confidence by international investors.

– A further deterioration in policy coherence and credibility, leading to lower GDP growth and/or macroeconomic instability.

The main factors that, individually or collectively, could lead to a revision of the Outlook to Stable:

– Stronger public finances, underpinned by a credible medium-term fiscal strategy that places gross general government debt/GDP on a downward path, accompanied by higher government revenue.

– Improvement in external finances, supported by lower net external debt or a reduction in refinancing risk; for example, from a lengthening of debt maturities or increased foreign-exchange reserves.

– Improved macroeconomic policy coherence and credibility, evidenced by more predictable policy-making and a track record of meeting previously announced economic and financial targets.
LIQUIDITY AND DEBT STRUCTURE

Strong Access to Local Banks: SLT’s liquidity – cash of LKR11 billion and committed undrawn bank lines of LKR13.5 billion – at end-December 2018 was sufficient to fund its LKR17 billion of debt maturing in the next 12 months. We expect SLT to refinance its short-term debt in light of its access to local banks. It has a solid record of accessing capital from local banks and capital markets.

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Sri Lanka’s Dialog Axiata hopes to hold prices despite rising costs

ECONOMYNEXT – Sri Lanka’s Dialog Axiata hopes to hold prices despite higher taxes, rising costs like energy, officials said as the country goes through the worst currency crisis in the history of its intermediate regime central bank.

High inflation following a collapse of the currency has reduced real incomes of customers.

“There are many factors to consider, especially with the last price increase we did in last year did not resulted in a significant increase in revenue” Pradeep De Almeida · Group Chief Technology Officer at Dialog Axiata said at the launch of its Future zone at Lotus tower.

In September,2022 following an electricity tarrif hike dialog increased its tariffs on Mobile, Fixed Telephone, Broadband Plans and Value Added Services (Prepaid and Postpaid) by 20 percent while tariffs on all Pay Television Services were raised 25 percent.

Value Added Tax (VAT) was also raised by the government from 12 percent to 15 percent on all Telecommunications and Pay TV services.

“Even though we increase the prices we only saw around 8-9 percent increase in revenue,” Almeida said.

“That is because many users cut off their usage to limit the spending”.

Dialog will increase efficiencies and manage costs in an attempt to avoid prices increases for customers, he said.

Over the 24 months to December 2022, Sri Lanka;s central bank has generated inflation of 76 percent, based on the Colombo Consumer Price Index official data shows. Following the currency collapse, more power tariff hikes are planned.

“We are trying to mainly bear the cost from our side. We are getting a massive support from our parent company Telekom Malaysia International,” Navin Peiris, Group Chief Enterprise Officer at Dialog told EconomyNext.

“Therefore as of now, there is no plan to increase prices”. (Colombo/Jan 26/2023)

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Sri Lanka shares fall at market close on profit taking

ECONOMYNEXT – Sri Lanka shares fell on Thursday as profit taking entered the market mainly on financial and diversified sectors, brokers said.

The main All Share Price Index (ASPI) fell 0.13 percent or 11.50 points to close at 8,926.56.

“The market was trading on dull trade mainly due to profit taking,” an analyst said.

“Also we saw investors taking a sideline as quarterly reports started to come”.

The earnings in the first quarter of 2023 are expected to be negative with revised up taxes and an imminent electricity tariff hike.

Earnings in the second quarter are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

The central bank’s policy decision was expected and investors have been eying on IMF deal with hopes of rapid economic recovery from the current unprecedented economic crisis, however since the market gained in the last sessions profit taking has come about, analysts said.

The market has been on a rising trend on the hopes of a faster IMF deal. However, the central bank government said the IMF deal is likely in the quarter or in the first month of the second quarter.

The most liquid index S&P SL20 fell  0.33 percent or 9.21 points to 2,798.

LOLC had seen some attention by investors as the firm disposed 90,256,750 shares held with Agstar PLC at 15-17.50 rupees a share.

The market witnessed a turnover of 1.2 billion rupees, lower than the month’s daily average of 1.9 billion rupees.

Expolanka dragging the market down closed 2.36 percent down at 186.7 rupees a share. Sampath bank fell 1.41 percent to close at 42 rupees a share while Royal Ceramic Lanka closed 2.59 percent dwn at 30.1 rupees a share.

(Colombo/Jan26/2023)

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Sri Lanka bonds yields steady at close

ECONOMYNEXT – Sri Lanka bond yields were steady at close on Thursday, dealers said, while a guidance peg for interbank transactions by the Central Bank remained steady.

A bond maturing on 01.05.2024 closed at 31.00/20 percent unchanged from the last close.

A bond maturing on 15.05.2026 closed at 26.60/90 percent, up from 28.50/70 percent on Wednesday.

A bond maturing on 15.09.2027 closed at 28.60/85 percent, up from 28.50/60 percent at the last close.

The three months bill closed at 29.75/30.25 percent unchanged from the last close.

The Central Bank’s guidance peg for interbank US dollar transactions appreciated by another 2 cents to 362.14 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 360.49 rupees on Thursday, data showed.  (Colombo/Jan 26/2022)

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