Fundamental ViewAS OF 09 May 2023
PLDT’s 1Q23 results were solid. Earnings growth was buoyed by sustained broadband and enterprise data demand that outweighed strong mobile competition and higher fuel/typhoon-related expenses. Credit metrics improved slightly to 2.8x/2.5x.
We anticipate its FY23 earnings to grow modestly YoY as strong broadband and enterprise data revenue growth outweigh strong mobile competition and hot domestic inflation. We take comfort in PLDT’s leading market position in the higher-margin broadband space.
While its capex overrun should keep FY23 capex elevated, we draw mild comfort that it was likely not due to fraud but rather a management misstep. The impact is also mitigated by PLDT’s robust operating cash flows and a further PHP 33 bn of tower sales closures by end-2023.
Business DescriptionAS OF 09 May 2023
- PLDT is a leading telecom operator in the Philippines, competing alongside its main rival Globe Telecom in a predominant duopoly.
- PLDT provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- PLDT operates through 2 main business segments – “Wireless Services” and “Fixed Line Services”.
- Its “Wireless” segment offers mobile voice, mobile SMS, mobile data and mobile broadband services to retail customers in the Philippines. These services are marketed under the “Smart Postpaid”, “Smart Prepaid”, "Sun Postpaid" and “TNT Prepaid” brands.
- Its “Fixed Line Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- PLDT commercially launched 5G services on a small-scale basis in Jul-2020. It currently has over 3,000 5G sites nationwide.
- PLDT maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 47% vs Globe 52%), the fixed line voice space (FY21 RMS of 90% vs Globe 10%), and the home broadband space (FY21 RMS of 45% vs Globe 31%).
- PLDT is backed by three established corporate groups, namely First Pacific (~15% stake), NTT Corporation (~12% stake) and JG Summit Holdings (~7% stake).
Risk & CatalystsAS OF 09 May 2023
Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at PLDT’s market share and restrain recoveries in average revenues per user (ARPU).
PLDT incurs significant capex that has restrained improvements in its leverage metrics and free cash flows. This is worsened by a recent capex overrun that has induced mild corporate governance uncertainties. Such uncertainties have eased since.
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged).
Key MetricsAS OF 09 May 2023
CreditSights ViewAS OF 09 May 2023
We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 bond trades 38 bp tighter than Globe’s Jul-2030 bond. We think PLDT should trade 25-30 bp tighter than Globe as PLDT’s IG rated status and stronger net leverage could outweigh its mild corporate governance flaws and higher capex. The concluded capex overrun audit helps to ease corporate governance fears and aid free cash flow recovery. Further clarity on US SCA lawsuits and management replacements are welcome too. Residual PHP 33 bn of tower sales would provide greater financial flexibility for capex funding and some mild deleveraging. While we acknowledge the risks of hot domestic inflation and strong competition, we think the impact is negated by its leading broadband market position and DITO’s debt woes.
Recommendation Reviewed: May 09, 2023
Recommendation Changed: May 31, 2022