Sri Lanka Telecom (SLTL), the island's leading integrated telecommunication service provider has recorded revenue of LKR12.2 bn, up 3% YoY, in 1Q2010, which was mainly driven by a 25% YoY growth in mobile revenue. The revenue growth has been somewhat restrained by the high price sensitiveness of the subscribers, price competition, increased cost of acquiring subscribers and the Telecommunication Regulatory Commission's (TRC) decision to lift interconnection charges, which resulted in SLTL foregoing 95% of its domestic interconnection charge revenue.
However during the quarter SLTL's has shown signs of turnaround, which would be further strengthened by the scheduled re-introduction of interconnection charges, cost savings deriving from accretive investments on technology and imposing a base-line tariff by the regulator in May ‘10. Further SLTL's operating costs have risen only by 9% YoY,despite increased operations in the mobile telephony segment. Subsequently EBITDA margins (excluding ITO Levy) have contracted marginally to 40% in 1Q2010. SLTL had made a net profit of LKR604 mn in 1Q2010, which is a 260% QoQ increase albeit the profit is down by 38% YoY.
Revenue has increased by 3% YoY to LKR12,208 mn in 1Q2010. SLTL’s revenue has increased by 3% YoY to LKR12,208 mn in 1Q2010 despite tariff reductions, increased competition, increased costs of acquiring subscribers and higher churn rates. The growth in quarterly revenue has been driven by higher income from the mobile operations which have increased by 25% YoY contributing for circa 30% of the cumulative revenue. Amidst stiffening competition SLTL has been able to grow its mobile subscriber base to circa 3.5 mn in 1Q2010. The long term growth driver broadband segment has increased its subscriber base by 57% during the past 12 months.
EBITDA up by 33% QoQ to LKR4,849 mn in 1Q2010. Operating costs have risen by 9% YoY to LKR7,359 mn in 1Q2010 mainly on account of the costs associated with the expanded broadband rollout and mobile net work costs. The relatively higher operating costs growth coupled with the slower growth in revenue has resulted in the EBITDA margin decreasing to 40% in 1Q2010 from 43% in 1Q2009, whilst recording a 4% YoY dip in EBITDA in 1Q2010. However the EBITDA margin has improved QoQ due to the 33% QoQ increase in EBITDA to LKR4,849 mn in 1Q2010 vs. LKR3,634 mn in 4Q2009.
Operating profit has surged four folds QoQ to LKR1,231 mn in 1Q2010. With the 9% QoQ decrease in Depreciation and ITO Levy, the operating profit has surged four folds QoQ to LKR1,231 mn in 1Q2010. However the Operating profit is down by 11% YoY despite the reductions in Depreciation and ITO Levy on the back of the 4% YoY reduction in EBITDA.
Profit before tax has increased by 321% QoQ to LKR943 mn. The 478% QoQ increase in operating profit has enabled SLTL to post a profit before tax of LKR943 mn up by 321% QoQ in 1Q2010, despite the voluntary retirement scheme of LKR188 mn and 7% QoQ increase net finance costs (albeit the PBT is down by 27% YoY in 1Q2010). The repayment of the USD100 mn bond in November 2009 has enabled SLTL to reduce finance costs, but the utilization of the sinking fund set to repay the USD bonds have reduced the finance income at a faster pace increasing the net finance cost by 4.5% YoY to LKR164 mn. Subsequently SLTL has increased its net profit after tax by 260% QoQ to LKR604.
Forecast 2010E net profit revised up by 6% to LKR3,294.7. We expect SLTL’s capital expenditure to remain high during 2009-2010 leading to negative free cash flow generation. SLTL’s transition to a next-generation network is estimated to cost around LKR7 bn in 2011 and is a non-cash accretive investment. The company also expects to spend circa LKR3.5 bn in improving telecom infrastructure in the Northern and the Eastern regions following the end of the civil war (Some investment has already been made). At the same time, some of SLTL’s new investments, namely, IPTV and Wi-Max operations are expected to take several years to break even, requiring SLTL to absorb their operating losses in the initial years. Though they would weigh on SLTL’s cash flows and lead SLTL to thinner margins the fast growth in the broadband segment, re-introduction of the interconnection charge, imposition of a base line tariff and cost savings deriving from accretive investments would strengthen SLTL’s profitability. Thereby we revise up our forecast 2010E net profit by 6% to LKR3,294.7 mn (Net profit excluding the ITO Levy refund stands at LKR1,242.3 mn) and forecast 2011E net profit to LKR1,591.8 mn. However we believe the future would be a rough ride for all telcos with the heightening competition.
Share is expensive on 20.0X forecast 2010E earnings and 41.4X 2011E earnings. Therefore given the high multiples the counter is expensive on 20.0X forecast 2010E net profit and 41.4X forecast 2011E earnings.On the back of low profits and fairly high CAPEX costs and heightening competition, we maintain our recommendation – HOLD
Source - Asia Research
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