Corporate News



By Daphne J. MagturoReporter


Can PLDT turn around its fortunes in three years?




Posted on March 03, 2016


ANALYSTS BELIEVE Philippine Long Distance Telephone Co. (PLDT) can turn around its fortunes and see profits grow again after a three-year digital shift, amid intensifying competition from rival Globe Telecom, Inc. and the looming entry of the San Miguel-Telstra tandem.

“It is possible, but it’s going to be challenging,” Nomura Securities Vice-President Pankaj Suri said in an interview with Bloomberg TV Philippines on Tuesday, when asked if PLDT’s three-year turnaround target is feasible.

“We actually have earnings going into positive growth territory by 2018… but the reality is there are so many moving patterns on this one. First of all, with the strategy being executed, the second concern that we have is Globe being way too aggressive, and the third thing is the potential launch from San Miguel-Telstra,” he added.

After its 2015 net income dropped by an annual 35%, PLDT slashed this year’s profit guidance by 20%, saying its transformation to a primarily digital business from a heavily legacy one will take three years to complete, and require higher capital expenditures and a halt to special dividends.

“We have to reset the dials of the company as we move to digital and this will not happen without pain. We have to be realistic about the current prospects and what the future will be,” Manuel V. Pangilinan, PLDT’s chairman, president and chief executive officer, had said during Monday’s briefing.

Sought for comments, local analysts said PLDT’s three-year time frame is feasible, but for Unicapital Securities Research Head Lexter L. Azurin, “three years is a very long duration, especially if you’re a business.”

Regina Capital’s Business Development Head Luis A. Limlingan said PLDT “might implement an infrastructure upgrade but there would be a newer technology by the time it is completed,” while RCBC Securities Research Head Raul P. Ruiz said the telco’s success hinges on “how management will be able to serve what market is looking for.”

In terms of competition, AB Capital Securities Senior Analyst Alexander Adrian O. Tiu said Globe is “less affected by what’s happening” because it has an effective marketing campaign and less legacy services such as international long distance (ILD) and national long distance, which Mr. Limlingan believes to be the cause of delay for PLDT’s digital pivot.

Mr. Pangilinan had said that PLDT’s high-margin ILD, which “used to be its strength,” has now become its “main weakness… leaving a gaping hole in our revenue” at around P4 billion to P5 billion annually.

Some analysts noted PLDT is playing catch up to Globe when it comes to the shift to digital. RCBC’s Mr. Ruiz said Globe has been able to “understand the market better,” while Nomura’s Mr. Suri said “a competitor actually did it a little earlier… definitely Globe has taken the lead on this digital media.”

ENTRY OF THIRD PLAYER
Also, the entry of a third player in a few months can be a “problem” for the two existing telcos, according to Mr. Suri.

“The entry of Telstra would thin out PLDT,” added Mr. Tiu, referring to Australia’s telco giant Telstra Corp. Ltd., which confirmed that it will likely invest up to $1 billion for a 40% stake in a joint venture with diversified conglomerate San Miguel Corp.

PLDT is heading toward “significant downgrades to earnings estimate from consensus,” dragged by flat service revenues, “consistent” loss of subscribers over the last four quarters, and the cut in dividends, according to Nomura.

“[O]n the dividends, the market is pretty used to around 90% to 100% pay out from this company,” Mr. Suri said. “I understand that they need to preserve capital… but the thing is that you know you’re not gonna go back to that 100% payout at least for the next couple of years.”

Mr. Pangilinan had said that this year, the company will pay out 75% of its earnings as regular dividends, but will not pay a special dividend.

“Our elevated capex (capital expenditure) levels and investment plans deem it necessary that we conserve cash and maintain debt at prudent levels whilst we are transitioning,” he explained.

PLDT ON CREDIT WATCH
In a separate statement yesterday, the Credit Rating and Investors Services Philippines, Inc. (CRISP) said it has placed PLDT on credit watch “pending a full review of the company’s financial and market performance.”

CRISP cited PLDT’s higher foreign exchange and derivative losses, impairment charges on Sun Cellular assets “rendered obsolete by the ongoing network upgrade,” investment in Germany’s Rocket Internet AG, lower share price at the end of 2015, and the depreciation of the euro relative to the peso.

“CRISP announced that it will review PLDT’s proposed market strategy and evaluate its plan to manage the increasingly tougher market competition,” the statement read.

The telco giant’s net income fell to P22.1 billion last year from P34.09 billion in 2014. Core net income -- derived from the company’s main business and which excludes both expenses and revenue from non-core activities -- decreased by an annual 6% to P35.21 billion from P37.41 billion in 2014.

Service revenues dipped by 1% annually to P162.93 billion from P164.94 billion, while expenses rose 11% to P144.43 billion from P130.46 billion.

PLDT shares yesterday recovered P69 or 3.93% to end trading at P1,824 apiece.

Hastings Holdings, Inc. -- a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc. -- has a stake in BusinessWorld through the Philippine Star Group, which it controls.