Dialog stable with ‘AAA(lka)’ Fitch rating

Fitch Sri Lanka has confirmed the AAA(lka) national rating of Dialog Telekom with a stable outlook, but said the telco’s credit metrics are likely to weaken due to higher debt, competition and economic pressures.

Head of Corporate Finance Dialog Telekom, Thivanka Ranagala said this is a result of managing the companies’ liquidity efficiently.

Asked to comment on the future he said that it seems very challenging and they were confidant of meeting these challenges efficiently.

Fitch has also confirmed the rating on Dialog’s outstanding preference shares of Rs. 5 billion at ‘AA+(lka)’.

“In Fitch’s view, Dialog’s credit metrics are likely to weaken due to its proposed debt-funded expansion, intensifying competition among local mobile operators, and macroeconomic cost pressures,” the rating agency said.

“However, the affirmation is driven by the implied support deemed to be available from Dialog’s largest shareholder, Telekom Malaysia International Berhad Group (TMI), which owns 83.15 percent of Dialog’s equity.

“The rating also factors in Dialog’s leading position in Sri Lanka’s mobile telecommunication landscape at present, and its continued strong operating cash flow generation.”

Fitch said Dialog’s contribution to TMI’s regional earnings was material, though on a reducing trend due to new investments as well as the intensifying competition amongst local mobile operators.

“However, Fitch believes that TMI’s commitment to Dialog should remain strong over the medium term given that Dialog is pioneering multiple service delivery platforms which should benefit TMI’s strategy over the longer term,” the rating agency said. Fitch said its position was justified by TMI’s contribution of over 13.05 billion rupees or 84 percent of the total funds raised during Dialog’s 2007 rights issue.

The rating agency said Dialog was losing market share owing to competition and that its subsidiaries, in which it has invested as part of its expansion, might remain a drag on its finances in the short term.

Dialog expects to invest a further 450 million US dollars over the three years ending 2010 as part of its expansion plan, which is expected to be funded by debt to a large extent.