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Fundamental View
AS OF 09 Nov 2022PLDT’s 9M22 results were stable. Earnings growth was buoyed by sustained broadband demand that outweighed strong mobile competition and higher fuel/typhoon-related expenses.
We anticipate its FY22 earnings to grow modestly YoY as persisting strong data demand outweighs slow mobile ARPU growth, strong mobile competition and rising inflation.
While FY22E capex is likely to be sizable, impending deleveraging efforts from a PHP 77 bn tower sale and leaseback (to conclude by end-FY22) and another smaller potential tower sale in FY23 may offset the credit profile strain.
We see PLDT as one of the strongest Philippine $ bond issuers based on credit fundamentals.
Business Description
AS OF 09 Nov 2022- 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 & Catalysts
AS OF 09 Nov 2022Mobile ARPU could remain dampened from stiff price competition, a continued decline in higher-margin voice services usage, and aggressively priced new offerings from new entrant DITO to attract subscribers.
New entrant DITO would likely chew away PLDT market share in future once it has built up its operations materially in 2-4 years.
PLDT incurs significant capex that has pressurized its leverage metrics and free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged) and interest rate risk (~40% of total debt is floating rate in nature and unhedged).
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
Key Metrics
AS OF 09 Nov 2022| PHP bn | LTM 9M22 | FY21 | FY20 | FY19 | FY18 |
|---|---|---|---|---|---|
| Debt to Book Cap | 69.7% | 68.3% | 67.0% | 64.2% | 60.2% |
| Net Debt to Book Cap | 65.0% | 62.3% | 55.9% | 56.7% | 42.5% |
| Debt/Total Equity | 230.3% | 215.2% | 202.9% | 179.6% | 151.1% |
| Debt/Total Assets | 45.8% | 43.8% | 42.2% | 39.8% | 36.5% |
| Gross Leverage | 3.0x | 2.8x | 2.7x | 2.5x | 2.6x |
| Net Leverage | 2.8x | 2.6x | 2.2x | 2.2x | 1.8x |
| Interest Coverage | 7.5x | 8.2x | 7.8x | 8.4x | 8.0x |
| EBITDA Margin | 48.5% | 50.7% | 50.4% | 49.6% | 42.4% |
CreditSights View
AS OF 09 Nov 2022We have an Market perform recommendation on PLDT. We think PLDT should trade 20 bp wider than Globe as potential corporate governance flaws and high capex could outweigh its rated credit status and stronger net leverage. We believe the recent PHP 48 bn capex overrun was largely due to weak internal controls and not fraud. We see PLDT as one of the strongest corporate $ bond issuers in the Philippines based on credit fundamentals. We believe the impending closure of its PHP 86 bn tower sale adequately covers the higher FY23E capex and could allow for 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: February 28, 2023
Recommendation Changed: May 31, 2022
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