Equity brokerage bullish on telcos despite higher levies

4 September 2015 05:08 am

Local equity brokerage Asia Securities in a brief research note said they were maintaining a bullish view on the country’s telecom industry despite the higher levies slapped on the sector.
This however comes in the wake of a recent report by international rating agency Standard & Poor’s (S&P) stating that the telecom companies in Sri Lanka face “moderate to high and increasing” regulatory risk.

The rating agency highlighted that regulatory disruptions such as the super gains tax and the pre-paid reload levy remain key risks for telecom sector operators in the country. 
Asia Securities however believes that the two leading telecom firms in the country—Dialog Axiata and Sri Lanka Telecom have strong balance sheets to pay these taxes with minimal impact.

“The recent 2Q reports show that the pre-paid levy has a much lower than expected impact on EBITDA margins,” Asia Securities said. 
It is expected that these taxes that were proposed in the interim budget this January will be passed in the new Parliament as the national unity government by the United National Party and Sri Lanka Freedom Party now have the parliamentary majority. 
“DIAL 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 percent of 2Q CY15 equity. While in the case of SLT it would account for only 2.6 percent of 2Q CY15 equity,” Asia Securities noted. 
“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 percent 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.”
Asia Securities acknowledged the S&P assertion that deeper smartphone penetration and lower capital expenditure will support the industry profitability.
“We believe (this) will happen given that 1) there are smartphones available for even Rs.6, 000 now and 2) both companies reported a lower than expected capex for 2Q CY15).”