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Dialog,
Sri Lanka’s most profitable listed firm, urged to broadbase
board
By Ravi Mahendra
Dialog GSM has posted its first post IPO annual results as at 31st
December 2005. The company’s shares presently trade as at
Rs 19. This article intends to analyse the company’s performance,
potential and risks which shareholders may face in the future.
Performance
I would analyse performance in terms of 3 criteria. Profitability,Cash
flow and Net Asset position.
Profitability
Profits have increased by 71% even though turnover has increased
by 60%. This is due to lower percentage increases in administration
expenses (40%) and distribution expenses (50%). The expansion seems
to be bringing in certain degree of economies of scale. If this
can be maintained earnings are bound to increase at a higher rate
than turnover in the future
Cash
flow
From a cash flow perspective the group has increased its cash and
cash equivalents (those instruments quickly convertible to cash)
by Rs 3.5 billion. While some of this is due to the high level of
fund raising in 2005 operational cash flows have increased by 23%
Net
Asset Position
The net assets of the company have increased from Rs 8.71billion
in 2004 to Rs 17.21 billion. The increase is due the expansion drive
during the year as well as increase in shareholders funds.
Potential
There is no doubt that the company is now in a very strong footing
and it is poised to grow in the future. It has built a very strong
brand and fortunately for its competitors are barely muddling along
without a clear strategy. A clear focus while there is competitor
inertia is likely to lead to high level of growth in an economy
like Sri Lanka where mobile phone penetration is still low and the
market can grow several folds over the years.
Risks
I would categorise the risks facing shareholder from the perspective
of this investment as external as well as internal.
External
As I often emphasise in my articles Sri Lanka continues to face
tremendous political risk in terms of social strife and failure
of law and order. The ceasefire is very fragile and failure of peace
talks could lead to a resumption of war. Dialog has set up a high
level of infrastructure in the North East and also derives certain
amount of its revenue from these markets. In addition to the North
East the whole economy would be affected by a war and that could
lower the earnings of the company.
Internal
As a listed public company which is controlled by a foreign
entity I believe there is a need for clear corporate governance
policies and practices. Dialog’s board appears to be dominated
by its parent’s nominees. There is a need for :
1)
High profile non executive directors
2) Segregation of powers
between Chairman and
CEO
3) Non executive director
based Audit and Remu
neration Committees
4)
Transparent
performance contracts
for Executive directors
5) Good Systems of Internal controls backed by
Internal Audit
Many British companies are implementing best practices such as Sarbanes
Oxley provisions even though they are not legally required to do
so. It is time that the best Sri Lankan companies follow this lead.
Message
to the
Investor
As at now Dialog shares trade at P/E multiple of 16.5. If earnings
can grow at the current rate next year this can push the share price
as high as Rs 32. The PE multiple can also increase with confidence
increasing and the price can even increase further. Dialog is indeed
a good stock. The difficulty lies in predicting how other factors
will affect the market in the near future.
(The
writer could be reached at ravim@icbsgroup.com)
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