Sri Lanka has also attained greater macro stabilty compared to my visit a year ago as it has strengthened its foreign reserves positon after the IMF agreement, while it has also brought about further reforms by introducing a new tax bill and recently introduced a new fuel pricing formula. However, GDP growth last year was well below its potental due to one off weather related issues which impacted agricultural output and rural consumer incomes. With agricultural output expected to improve this year, economic growth rates should stabilise in 2018.
The recent local elections which were held in February 2018 saw the party of the former president, Mahinda Rajapaksa, win the most number of votes and seats in a setback to the currrent ruling coaliton partners. With presidential elections expected to take place at the end of 2019, the contest, it seems, could be hard fought and close given the inroads the former president’s party has made in the local elections.
Economics and politics aside, the conference gave me a chance to meet with a range of companies as well as meet with some companies outside of the conference. One of the interesting companies that I met with and which is now the largest Sri Lankan holding of the AFC Asia Frontier Fund is a telecom company with the largest market share in the mobile telecom segment, Dialog Axiata., The company is seeing high growth in its data and broadband business due to increasing smart phone penetration and greater network coverage. It trades at a steep discount to regional peers and is significantly more efficient than its closest competitor, Sri Lanka Telecom. The company is expected to benefit from ongoing consoldation in the Sri Lankan telecom industry and its data and broadband revenues increased by 34% and 39% YoY in the most recent quarter.
Recently, however, there have been some regulatory changes which have impacted sentiment with respect to its stock price. In last year’s budget, the government proposed a telecom tower tax on tower operators and this tax is expected to be implemented, but in a more toned-downed fashion which will impact the company’s net profits by about 3%, which is not severe. The telecom regulator also plans to do away with price floors for mobile voice calls which has led to a fear that there could be much higher price competition amongst telecom operators in the voice business. However, only two players, Dialog Axiata and Mobitel (part of the state owned Sri Lanka Telecom) are profitable and each holds the first and second position in terms of subscriber market share, so any sustained price war in voice services is debatable while growth is being driven by data and fixed broadband which are Dialog Axiata’s strong points given its network coverage.
Sri Lanka has the location and the assets to take its economy forward and with ongoing developments, both in the tourism sector as well as to promote further trade and investment, the country appears to be moving in the right direction despite the political noise. Colombo most likely will look like a different place five to ten years from now. The current uncertainty across frontier and emerging markets has also made valuations more attractive with the Colombo Stock Exchange All Share Index trading at a trailing twelve-month P/E of 10x which provides bottom up opportunities to find value in sectors like banks, telecom, and diversified conglomerates where the leaders in these sectors have displayed consistent earnings growth over the long run along with stable management teams.