Five facts (source) about the Philippine Long Distance Telephone Company (PHI, Financial):
- An 86-year-old telecom company.
- Slogan: “We’re Changing Lives.”
- Has 64.9 million Philippine mobile subscribers or ~63% of the Philippine population as of recent filing.
- Traces its history to General Telephone & Electric Corporation, now known as Verizon (VZ, Financial).
- Eight percent portfolio weighting in iShares MSCI Philippines ETF.
The company recently made an earnings announcement whereby:
- Fiscal Year 2015 profits were at Php35.2 billion, 5.9% lower than 2014.
- Further, core earnings are expected to drop another 20% to Php28 billion this year (2016).
*Php = Philippine peso; author will proceed using the local currency to value the company; and later will correlate it with the company’s ADR shares.
Thus, Mr. Asian Market reacts and sends the stock down ~18%.
So the company forecast a possible 20% decline in its profits, thus punishing its stock by 18%.
Is this rational?
Before proceeding with financial ratios, I found another interesting fact about Philippine Long Distance’s recent filing:
PLDT mobile subscribers:
The number of cellular subscribers declined by 7% – from 69.8 million in 2014 to 64.9 million in 2015. In its previous 2014 annual report, Philippine Long Distance reported a loss of 0.27% in its subscribers from 2013.
What’s causing this drop in cellular subscribers?
As obvious as it can be, archrival Globe Telecom (GLO, Financial) achieved double-digit growth in new mobile subscribers in the same year.
Three facts about Globe Telecom:
- An 87-year-old telecom company.
- Slogan, “Creating a Wonderful World.”
- Has 52.9 million Philippine mobile subscribers or ~52% of the Philippines population*.
*I used Trading Economics data in determining the total population in the Philippines, which is 102.2 million as of 2015. This makes a conflict when computing the exact market share of these two telecom giants. If Philippine Long Distance’s market share is at 63% and Globe’s market share is at 52%, then that would be 115% and not 100% of the total population. In summary, these numbers just prove how huge these Philippine telecom giants are when it comes to mobile subscribers.
Globe mobile subscribers:
Globe announced a 20% growth of mobile subscribers from 2014 to 2015 from 44 million to 52.9 million. This is versus Philippine Long Distance’s 7% decline in its subscribers (loss of 5 million subscribers).
Philippine Long Distance losing mobile subscribers:
(source PLDT 2015 annual report)
Losing this number of subscribers may not have hurt Philippine Long Distance’s top line yet. Total wireless revenue, including cellular service, represented 67.5% of its total revenue. Total wireless revenue was only down 3% in 2015 compared to 2014.
Nevertheless, Philippine Long Distance’s 18-year tenured Chairman Manny Pangilinan, age 69, could never have been more candid and stated, “Last year alone we lost about 5 million subscribers to Globe. … The loss of subscribers to Globe and incremental ads they managed to gain accounted probably for the biggest hole in our service revenues in prepaid.” (source)
Now, why the 20% projection drop in 2016 profits?
Philippine Long Distance is shifting its operations from the traditional businesses (such as international and national long distance and SMS revenues) to become data-oriented.
Data and broadband services contributed 30% of Philippine Long Distance’s total revenue. The company projects the services will contribute 40% the next three years (2016-2019). Data and broadband services jumped 16% in 2015 from 2014.
Philippine Long Distance is taking into account any possibility of any new competitor entrant in its almost-monopolized telecommunications industry position in the Philippines, such as the pending Telstra-San Miguel joint venture (source).
Before moving on to the numbers, this is the obvious difference in the two giant telecommunication companies in the Philippines:
Obviously, Philippine Long Distance, despite its recent poor profit performances, still demonstrated its responsibility of carrying out its dividend policy and stating even its payout ratio. Globe, on the other hand, has all the rights to demonstrate its outstanding growth in subscribers.
Capex/Revenue:
Capital expenditures as a percentage of revenue revealed that both telecom giants have maintained their budgets over the past decade at ~30% of gross revenue.
Looking more closely at the data, Globe Telecom appears to have outspent Philippine Long Distance in recent years while Philippine Long Distance was doing the inverse.
Profit growth:
Globe Telecom had an outstanding – an understatement – year in 2014 when it grew its profits by a whopping 170%! This, of course, was propelled by its already increasing subscribers (source).
Profit margin:
Philippine Long Distance has always been more profitable than Globe Telecom.
Dividend plus share buybacks as a percentage of company profits (%):
It appears that both companies pay out most of their earnings to their investors – a rare occurrence in most Philippine companies.
Globe has been paying more than its profits. A conservative investor would seek less than 80% payout at least. *Share buybacks are inconsistent in these two companies.
Debt to Equity ratio:
Both companies have been ramping up their debts since the Great Recession.
Dividends+Buybacks/Free cash flow (%):
Payouts as a percentage of each company’s free cash flow further presented an unpleasant picture for conservative investors. Globe has a 10-year average payout of 134% while Philippine Long Distance has 85%. No wonder debt is rising.
Intrinsic Value Calculations
Simple multiple
Simple calculation revealed that, at current market price, the company is still overvalued by 33%.
Capital Asset Pricing Model (CAPM)
CAPM model revealed a conservative valuation with an assumed 5% growth rate.
Using expected GDP growth rate of 6.5% in 2016 forecast by Nomura Securities (source) still revealed a conservative value per share.
*Data that were used in the calculation not included in the graph above were as follows: corporate tax rate of 22%, company debt interest rate of 2.44% (basing it on bonds maturing on March 6, 2017), equity risk premium of 8.84% from Professor Aswath Damodaran (NYU Stern published data per country) and average beta of 0.89.
In summary, CAPM revealed that, because of Philippine Long Distance’s debt numbers, its valuation lessened by 40 to 44%. The average of the three calculated values gave me Php 896 per share or $19 per share (FOREX 1 Philippine peso equals 0.021 U.S. dollar). This value represents a current P/E ratio of just 9.
Nevertheless, add in the high percentage payout ratios, increasing debt, heightened competition (Globe), threat of new entrant (Telstra-San Miguel) and declining profit margin. There may be a better ADR out there for most conservative investors.
Happy investing!
Mark Yu
