JKSB to revise earnings forecast higher for Dialog post Suntel merger

John Keells Stock Brokers (JKSB) said last week that it will revise upwards the earnings forecast for Dialog Axiata following the planned acquisition of Suntel Ltd. This assessment is contained in a news update from JKSB, excerpts of which are as follows:

Dialog Axiata PLC (DIAL) has announced plans to acquire a 100% shareholding of wireless fixed line operator Suntel Limited (Suntel), via its wholly owned subsidiary Dialog Broadband Networks (Pvt) Ltd. (DBN). The transaction is estimated to be completed at an Enterprise Value (EV) of US$ 33.9m-34.9m, which corresponds to an annualised CY11E EV/EBITDA of 3.5x-3.6x.

The acquisition would be funded solely through the use of internally generated Group funds – DIAL had a substantial free cash flow position of Rs. 3.2 b (US$ 28.1m) as at end 3QCY11.

The merged entity would have a combined revenue market share of 16%, advancing DBN’s market position to number two in the fixed/converged services space.

Moreover, the transaction would provide DBN access to Suntel’s large, well established corporate customer base of over 50,000 active lines. As per management, the transaction should be completed in 60-75 days (i.e. balance sheet amalgamation from 1QCY12 onwards).

Based on CY10 financials, the transaction is expected to be 12% revenue accretive and 9%

EBITDA accretive (12.5% accretive based on CY11 combined EBITDA) to DIAL, and marginally accretive in terms of PAT. We expect the transaction to be neutral in terms of EBIT accretion, given that Suntel will align its depreciation policies in line with DIAL prior to closure of the transaction (DBN has carried out accelerated depreciation of its WiMAX and CDMA networks since 4QCY09).

As per management, the primary strategic rationale behind the acquisition is to provide DBN with the scale required to capitalise on the fast growing Enterprise and SME Fixed/Converged services market (10% CAGR 2010-15E). As the last entrant in the fixed telecom space, DBN has historically lagged incumbents in terms of revenue market share and market position.

Despite the State operator SLT’s continued dominance, we expect the merged entity to leverage on potential bundling opportunities offered by DIAL’s command of the mobile enterprise space (over 75% market share) coupled with Suntel’s large base of Enterprise/SME clientele in the Fixed/Converged Services market. This suggests incremental revenue generation going forward, leading to market share expansion.

Suntel currently generates 40% of revenue and 75% of EBITDA from its corporate client base of roughly over 50,000 active lines.

DIAL management estimates a potential overlap of 30% of customer accounts.

DIAL management also anticipates annualised cost savings of up to Rs. 600 m as a result of the acquisition, stemming from spectrum rationalisation, tower and network consolidation, and support operation rationalisation.

Given that the merged entity would have access to shared services of the Group, a VRS (Voluntary Resignation Scheme) would be introduced in preparation for the merger. Suntel’s current headcount stands at 700 employees.

As per DIAL management, the merged entity would continue to utilise the “Suntel” brand name in certain market segments, post the amalgamation.

Suntel currently enjoys a tax holiday up to 2016E. Given that DBN’s tax holiday expired in December 2010, the merged entity should settle into a mid-point date.

DIAL management does not rule out the potential for further acquisitions going forward, primarily on the Spectrum front.

Our full year CY11E earnings forecast of Rs. 5.1 b (after preference dividend) is likely to be revised post completion of the transaction, when Suntel’s earnings are disclosed.