Asia Securities says S&P telecoms report on Sri Lanka unjustified

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Sep 04,2015 (LBO) – Sri Lanka’s Asia Securities says it is bullish on the Sri Lanka telecommunication sector even though a recently released report by Standard & Poor’s ratings agency sees telecom regulatory risk in Sri Lanka as high.

S&P highlighted that they see a high regulatory risk in Sri Lanka with regulatory disruptions such as the super gains tax (SGT) and the pre-paid reload levy which remain a key risk for telecom operators in the country.

The island’s telecom market is relatively small but mature compared to neighboring countries of Bangladesh, India, and Pakistan. Competition is high and in need of consolidation with smaller players not being able to increase market share, they said in a report on emerging Asia’s telecom industry.

“From a regulatory perspective, we view the greatest risk to telecom operators to be in Bangladesh, India, Pakistan, Sri Lanka, and Thailand, although proposed reforms could help to moderate risks in some of these markets, such as India and Thailand,” Standard & Poor’s ratings agency said.

“We also see a high degree of telecom regulatory risk in Bangladesh, India, Pakistan, Sri Lanka, and Thailand, although proposed reforms could temper risks in some of these markets.”

Pakistan has the highest country risk followed by Sri Lanka, Indonesia and Bangladesh, according to the report.

Sri Lanka has more than 22 million mobile connections, exceeding the country’s population. About one-fifth of these subscribers are multi-SIM users, indicating a high degree of market saturation.

Sri Lanka’s mobile market include five players Dialog Axiata, Sri Lanka Telecom–Mobitel, and Etisalat being top three controlling more than 85 percent of the subscriber base while Hutch and Airtel controls an smaller segment.

“We see the Sri Lankan telecom market as a relatively mature market with its top-three players maintaining relatively stable market shares in 2015,” Standard & Poor’s ratings said.

“The market is likely to expand by 6 percent to 8 percent in the next couple of years, broadly in line with our GDP growth estimates for the country. Deeper smartphone penetration resulting in increased data consumption and lower capital spend should also support industry profitability,” it said.

“We also see potential for consolidation, especially with the weaker players eyeing an exit from the market.”

“Over the past few years, the smaller players have not been able to gain meaningful market share and with increasing market saturation, we expect these players to make way for consolidation in this small market.”

“However, potential regulatory disruptions, for example the super gains tax and the prepaid card levy, remain a key risk for Sri Lankan telecom operators.”

But despite Standard & Poor’s ratings view on the telecommunication sector in Sri Lanka, Asia Securities is in the view that this is “unjustified” and would maintain “bullish” view on the sector.

“We are of the view that both SLT and DIALOG have strong balance sheets to pay out the SGT (Sri Lanka Government Tax) with minimal impact if needed, and the recent 2Q reports show that the pre-paid levy has a much lower than expected impact on EBITDA margins,” Asia Securities said in a statement.

“DIALOG has already retained cash within the company by cutting dividends in case the SGT does get passed in the parliament and even then would account for only 3.8% of 2Q CY15 equity. While in the case of SLT it would account for only 2.6% of 2Q CY15 equity,”

“On the pre-paid levy we note that the market was expecting an EBITDA margin decline of around 10pp on the mobile side. However, we highlighted in our initiation report that the impact would be around 4-5pp due to the strategy of giving the 25% as bonus talk time as opposed to bearing it on a cash basis,”

“The fact that for 2Q CY15 both companies reported a lower than expected EBITDA margin decline of 2pp further supports our view,”

“The article does go on to say that deeper smartphone penetration and lower capex will help support industry profitability which we believe will happen given that there are smartphones available for even LKR 6,000 now, and both companies reported a lower than expected capex for 2Q CY15.”