KUALA LUMPUR: The turmoil in Sri Lanka is expected to adversely affect Axiata Group Bhd's earnings and valuation, analysts said.

But Axiata said its operation there was strong enough to tide over the difficult times.

The telecommunication company, nevertheless, acknowledged that the ongoing economic risks of its Sri Lankan operations via subsidiary Dialog Axiata plc particularly and regulatory issues in Nepal generally, were a concern.

"Axiata is closely monitoring the situation in Sri Lanka. Our operating company Dialog has been consistently communicating with all stakeholders, including employees, customers, and vendors in Sri Lanka to manage the potential impact it may have on the business," Axiata told the New Straits Times.

Axiata said the company regularly assessed any business, operational and financial risks as part of its operations, and expected forex translation impact and unrealised losses, some of which would be reflected in its first quarter (Q1) of 2022 results.

Dialog's balance sheet has the requisite capacity with enough liquidity to continue operations effectively in these difficult times, it added.

"Dialog will be able to sustain itself through this crisis and will continue to exercise prudent financial and operational management to navigate macro uncertainties arising from the current situation," the company said.

Sri Lanka is facing an unprecedented economic crisis with its rupee having depreciated by 42 per cent against the ringgit year to date.

Inflation hit 29.8 per cent in April, and the government had suspended foreign debt payments and its president recently declared a new state of emergency. 

Looking ahead, high global commodity prices might continue to fuel inflation, prolonged protests affect the recovery in tourism and political uncertainties affect investor and business confidence, analysts said.

Affin Hwang Capital analyst Isaac Chow said the crisis in Sri Lanka was going to affect Axiata and Dialog on several fronts including margin compression (revenue growth should lag cost inflation) and higher finance costs.

Chow said the crisis would also cause lower profit in ringgit terms due to currency depreciation, potential increase in taxes, lower free cash flow for the group as well as weigh on Dialog's valuation multiple. 

"Dialog Axiata is Sri Lanka's largest telco and a key contributor to Axiata's earnings, accounting for 21-30 per cent of Axiata's 2018-2021 normalised profit after tax after minority interest (Patami).

"In 2021, Dialog Axiata contributed to 26 per cent of Axiata's normalised Patami. Hence, we expect Dialog's earnings contribution to fall sharply due to the depreciation of Sri Lankan rupee and margin compression," he said in a report.

Hence, Chow said the firm was cutting its 2022-2024 earning forecast by 13-15 per cent after incorporating a lower earnings contribution from Dialog. 

In tandem, he said Affin Hwang was lowering its target price to RM3.40 from RM3.85 on Axiata after trimming its valuations of Dialog and Celcom. 

"We maintain our Hold call on Axiata. The regulatory risks in several markets, rising interest rate and uncertainties in regional economic growth will likely continue to weigh on Axiata's business operations. However, we believe these negatives are partly reflected in the share price – over the past three months Axiata's share price has skidded by 13.5 per cent," he added.