Can Philippine’s Second-Largest Telco Company PLDT Regain Its Lost Market Share?
Highlights:
- Broadband expansion unlocks growth, but is competitive
- Superior network quality helps to defend market share
- Ancillary businesses are important in the long-term
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PLDT’s revenue breakdown 2020
Price and volume remain bullish
- In 2H21, PLDT saw a massive 50%+ share price increase
- The increase is mainly attributable to positive news about its latest fintech investments PayMaya and soon-to-launch digital bank Maya
- Price signal remains strong as 50DMA is well above the 200DMA
- Volume RSI has been strong recently; hence, still providing good support
Broadband expansion unlocks growth, but is competitive
- While the mobile market in the Philippines is already quite mature, PLDT sees good growth prospects for home broadband
- The pandemic triggered increased demand for fast internet connectivity at home
- Hence, PLDT engaged in an extensive fiber optics rollout which currently passes 13m homes, providing strong growth opportunities
Its closest competitor accelerated its rollout as well
- PLDT has started much earlier with its fiber optics rollout than its main competitor Globe
- However, during the past 3 years, Globe saw an exponential growth attributable to its high CAPEX allocated to broadband
- In 21E, Globe might surpass PLDT for the first time in terms of total broadband subscribers
Superior network quality helps to defend market share
- In March 2021, the China-backed company Dito started its commercial operations and challenges the duopoly
- Throughout the past year, it already acquired 5.3m subscribers
- Annual CAPEX of more than PHP50bn to expand network coverage fast
- For 2022, Dito targets to double its subscriber base to 12m, which means it could steal subscribers from PLDT
PLDT offers the fastest internet connectivity in the Philippines
- PLDT continues to defend its dominant position in terms of network quality
- The download speed is almost 2 times faster than both of its competitors
- Maintaining a superior quality is necessary to avoid losing customers in a mature market
- Hence, I believe that PLDT can withstand price pressures from Dito in the near-term future
Ancillary businesses are important in the long-term
- Through its investment in Voyager, PLDT offers the mobile payment solution and e-wallet “PayMaya”
- With 41m registrations, it is the second-largest e-wallet in the Philippines (Globe’s GCash has 51m users)
- The e-wallet business still produces annual losses of PHP2bn+, providing a drag on profits in the short run
- However, the investment could pay off big in the future
Driving growth by bundling services
- PLDT also tries to grow its data segment by investing in value-added content services such as Pay TV
- The most prominent one is Cignal TV, part of PLDT’s investment in MediaQuest
- Cignal TV has 3.7m subscribers as of 3Q21
- It allows PLDT to create attractive bundle offers of mobile, fixed-line and TV packages
- I believe that complimentary services like this are going to be important to realize growth in a mature market
FVMR Scorecard – PLDT
- A stock’s attractiveness relative to stocks in that country or region
- Attractiveness is based on four elements
- Fundamentals, Valuation, Momentum, and Risk (FVMR)
- Scale from 1 (Best) to 10 (Worst)
Consensus don’t see further upside
- The majority analysts has a BUY recommendation, but upside is already captured by recent price rally
- Consensus expects solid single-digit revenue growth for the future
- Also, margins are expected to stay stable
Get financial statements and assumptions in the full report
P&L – PLDT
- Its investment in the e-wallet PayMaya is still not profitable yet but could start deliver profits in 22E
- Over time, it could evolve to a serious profit contributor
Balance sheet – PLDT
- Heavy CAPEX required to expand broadband and 5G coverage to defend market share
- Issuance of long-term debt necessary to fund expansion
- Operating cash flows are not sufficient to fund growth internally yet
Ratios – PLDT
- Dividend payout is high which means it could continue to deliver a solid dividend yield of 4%+
- Leverage slightly increased over time
- However, I don’t expect it to grow much further
Long-term share price performance potential
Free cash flow – PLDT
- Negative FCFF in 2019 likely to be an exemption
- I expect stable and growing FCFF from 21E onward
Value estimate – PLDT
- Similar to consensus, I expect stable revenue growth over the next few years
- I am a bit more optimistic on margins as I expect the third competitor Dito will not be able to scale fast enough and achieve similar network quality
- Over the long run, I assume PLDT to grow in line with population growth, which is around 2%
World Class Benchmarking Scorecard – PLDT
- Identifies a company’s competitive position relative to global peers
- Combined, composite rank of profitability and growth, called “Profitable Growth”
- Scale from 1 (Best) to 10 (Worst)
Key risk is intensified price competition
- Less-than-expected return on CAPEX in a capital-intensive industry
- Overestimation of profit contribution from Fintech investments
- Failure to keep up with technological changes
Conclusions
- Maintaining a superior network quality is critical success factor
- FinTech investments and value-added services could drive stable growth in a rather mature market
- High ROE and dividend yield make it an attractive play
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