Fitch assigns 'AAA (sri)' rating to Dialog Telekom

Fitch Ratings Lanka Ltd today assigned Dialog Telekom Limited a Senior Unsecured Long-term rating of 'AAA (sri)'. The Rating Outlook is stable.

AAA (sri) credit ratings denote the lowest expectation of credit risk. This rating is assigned only in the case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

Dialog's rating reflects its position as Sri Lanka's leading mobile operator (with c.60% market share) with strong brand recognition and, as well as its robust operating performance, sound margins, strong cash generation and adequate liquidity.

The strong track record of the key management and operational benefits derived from its strong dominant parent, Telekom Malaysia Berhad ("TM", rated 'A-' internationally by Fitch) are considered positively.

The rating also takes into account credit concerns such as the evolving regulatory framework, the intensifying competitive environment and a substantial increase in capex leading to negative free-cash flow generation (after dividends and capex) in the short-term.

Despite being the last of the four mobile operators to commence operations, Dialog has rapidly gained market share by successfully executing a strategy of launching operations with strong initial geographic coverage, effective branding and innovative product offerings.

The growth potential in the mobile telephony sector remains robust with mobile and fixed-line penetration still low at c.12% and 5% respectively. Owing to high capex, Dialog was free-cash flow negative till FY04 (free-cash flow generation in FY04 was LKR2.bn) The company would be free-cash flow negative in FY05 owing to a spike in capital expenditure.

However, strong free-cash flow generation is expected once capex moderates after 2006. Although high, the dividend payments (of 40-60% of post-tax profits) appear manageable during this period of heavy investment outlay without much deterioration of the credit profile.

Its liquidity position is also backed by adequate committed undrawn credit facilities and vendor financing available on telecom equipment purchases.