Colombo Bourse would be more attractive to large foreign funds....
Dialog IPO to raise CSE’s market capitalization by 20%

Dialog Telekom’s Initial Public Offering (IPO), which has created much interest in the Colombo Bourse is likely to be snapped, perhaps oversubscribed many times over considering the performance of the company and the growth in the industry, Stock brokers said yesterday. Dialog stock is extremely attractive because the company has made over Rs.4 billion in profit and is the most profitable company in Sri Lanka, they said

The Dialog Telekom initial offer, which is launched on a book building structure, consists of 712,336,293 shares, which is 9.6% stake of the company. The issue which is open for subscription on July 07, will offer Rs.1/- par value shares of the company at a price range of Rs.8/- to Rs.12/-. The issue is expected to raise capital in the range of Rs.5.7 billion-Rs.8.5 billion, is by far the biggest IPO to be launched in the Colombo Bourse.

The CEO of NDB Stock Brokers, Kishan Vairavanathan told ``The Island" yesterday that the Colombo Stock Exchange (CSE) would benefit from the Dialog IPO as the market capitalization is likely to increase by 20%. Presently the market capitalization of CSE is around Rs.500 billion and with Dialog launch, this figure would rise to about Rs.600 billion, which make the Colombo Bourse more attractive to bigger foreign funds. Dialog will be the biggest capitalized share in the Colombo Bourse by far. Presently, bigger funds are not investing in CSE because of its relatively smaller size in market capitalization, he said. Once foreign buyers are attracted to the market, they would be investing in other stocks as well.

Dialog is top quality company, which is leading a growth industry in Sri Lanka, Vairavanthan said. In this sense, the public will have the opportunity to invest in quality share. Stock brokers said that according to the demand, the share value should increased on the first day of trading. But they pointed out that given the profitability of Dialog Telekom and the way the company is managed, it is rather likely that most people will hold on to Dialog shares rather than trade as soon as the shares are traded on the Colombo Bourse. In either case the investor would benefit, brokers said.

Sampath Securities said last week that Dialog Telekom Limited, formerly MTN Networks Pvt Ltd.,) is a wholly owned subsidiary of Telekom Malaysia Bhd, which is one of the largest telecommunications operators in the South East Asian Region with a market capitalization of US$ 8.9 billion. The parent Telekom Malaysia earned USD 3.5 billion revenue and profits after tax of USD 687 million for the FY 2004, making it one of the largest telecommunications operators in the South East Asian Region.

According to SCX Securities, It all started in year 1995, when Dialog Telekom entered into Sri Lankan Mobile Sector as the last operator (fourth player). Dialog made its first profits in just three years after entering in to the telecommunication market and became the market leader in year 2005.

At present, Dialog covers 60% of the land masses and 80% of habitat areas in Sri Lanka and

further hopes to cover all possible areas in the Country. Dialog decided to invest in the North & East of Sri Lanka within a very short span of time since the establishment of a temporary ceasefire in 2003. By venturing in to a high risk Investment, the company was able to convert 3,000 landlines then existed to a significant 250,000 mobile users in Jaffna today. Dialog has established a solid dealer network across the Country. It has more than 10,000 retail distribution outlets for prepaid accounts and has more than 2,000 points of presence including the Northern & Eastern Provinces. In terms of coverage, the firm managed to record a 45% cumulative average growth rate (CAGR). Dialog has 500 base stations at present in all 9 provinces providing access to many cities, suburbs and villages including North & East.

Dialog offers a wide range of communications products and solutions spanning from core Voice services to Text and Image based Value Added Services, Mobile data Services and mobile Internet. The company was the first to introduce third generation (3-G) & wireless technology to the South East Asian Region.

Dialog against the mobile sector

According to a report done by Visiongains Company on "Global Mobile Markets", pointed out that the global mobile phone market is set to witness future growth that will see subscriber numbers almost doubling from a total of around 1.2 billion at the end of 2002, to 2.2 billion by the end of 2008. The report further highlighted the fact that the number of subscribers will continue to grow in all markets, but the Asia Pacific market will account for nearly 55% of the global mobile market by year 2008 making the region to be the world’s telecom hub.

The telecom sector in Sri Lanka has low penetration levels compared to global standards.

Telecom and Mobile penetration levels stood at mere 16.39% and 11.40% as at year end 2004, which means that the local mobile telecommunication industry exhibits substantial growth potential. Declining trends in handset prices, mobility, Value added Services, minimization of tariff related entry barriers through the introduction of pre-paid services which means less commitment has also contributed towards the industry to grow at a rapid rate of 50% CAGR since year 2000- 2005.

In Sri Lanka’s mobile phone market, Dialog Telekom is the market leader 60% market share followed by Celltel Lanka (Pvt) Limited 20%, Mobitel (Pvt) Limited 17% and Hutchison Telecom. Lanka (Pvt) Ltd 3%. The company was also able to reduce IDD call charges in the market by 70% and has direct access to SEA – ME – WE 3 via Telecom Malaysia. Dialog also has a retail internet customer base of just 6,000 which is supposed to grow at a rapid rate in the coming years.

Performance Review

Having made its first profits in 1998, Dialog Telekom marched forward to be one of the best performing, efficiently managed and one of the most profitable companies in Sri Lanka. It has exhibited consistent growth throughout the years. Dialog Telecom recorded a net Profit of Rs 4.10 billion for the year ended 31 st December 2004 while the revenue for the same period was a thumping Rs 11.41 billion, SC Securities said.

It is a cash cow company with a balance of Rs 3.1 billion. In a post IPO world, Dialog will have a forward PE multiple of 16 times at Rs. 12.00 level making it look expensive. But, when looking at the forward forecasted Sector PE of 15.8 it seems fair. Dialog has a return on capital employed (ROCE -1 st quarter ended) of 48% compared to 30% for the corresponding period in FY2004 while the return on shareholder equity increased from 64% in 2004 to 91% in 2005.

However, the company made a net profit after tax of Rs 1.7 billion for the first quarter ended 31 st march 2005 and its profits shot up by 66% when compared with the first quarter of 2004 results (Rs 1.03 billion).

Dialog Telekom has exhibited phenomenal growth potential and will continue to be one of the successful corporate stories in Sri Lanka. Dialog is well geared and cash rich with future high – dividend potentials. Its main revenue earner is post – paid segment and constitutes a big block of 43% of its total revenue. Dialog also made Rs 6.9 billion from operating activities, representing a 100% increment from the previous year same period.

Dialog has a successful business model where the focus is on revenue and margin per minute, where every minute of air time used will make dialog richer minute by minute. This business concept has indeed helped the company to hedge against political risks which many firms are exposed to in Sri Lanka. The company has a tax break of 15 years until year 2012 and a concessionary tax rate of 2% thereafter on revenue for the next 15 years or the prevailing corporate tax rate which ever the lower.

Dialog has invested in a USD 20 million project to replicate all critical Network elements to ensure business continuity in the event of major disasters and fully insured against any calamities. The Company has also managed to retain its 100% Senior Management team since 1997. Most importantly, Dialog is corruption free and an efficiently managed company which has the backing of Telecom Malaysia.


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