We expect PLDT to retain its position as the leading integrated telecommunications service provider in the Philippines in terms of subscribers and revenue. As of Sept. 30, 2012, the company has a subscriber base of about 68.6 million in the wireless market, 2.1 million (including 300,000 of Digitel) in the fixed-line segment, and 3.2 million in the broadband segment. Together with Digitel’s subscribers, PLDT has a subscriber market share of about 65% across all segments. We believe the Digitel acquisition further strengthens PLDT’s competitive position in the cellular segment and its growth opportunities in broadband services.
We anticipate that PLDT’s operating performance will be in line with our expectations for full-year 2012. Revenue increased 12.7% in the nine months ended Sept. 30, 2012, primarily on account of the Digitel consolidation. At the same time, the company’s existing operations (excluding Digitel) performed more weakly, with revenue down 2%. This is because of the decline in voice and messaging revenues despite increased volume, stemming from the popularity of unlimited data and bucket plans. PLDT’s EBITDA margins declined almost 600 basis points to 49.3% because of weaker margins at Digitel, intense competition, and higher marketing expenses, including subsidies. Margins were also undermined by a shifting revenue mix from the higher-margin SMS and international voice to the relatively lower-margin revenue streams of broadband and business process outsourcing.
We believe that PLDT’s earlier plan to invest Philippine peso (PHP) 6 billion in the media business (TV content production and direct-to-home business)--if implemented--will only have a marginal negative impact on the company’s operating and financial metrics. In our view, the investments in TV5 and Cignal TV through MediaQuest Holdings Inc. (not rated) will complement PLDT’s existing broadband business. However, we have not consolidated the MediaQuest acquisition in our forecasts for now because the strategy and accounting for the media business is still evolving.
We assess PLDT’s financial risk profile as “intermediate.” We expect the company’s positive free operating cash flow and financial ratios to remain strong. Our view considers PLDT’s higher cash capital expenditure of PHP31 billion in 2011 and plans to increase it to PHP38.1 billion in 2012. The spending is part of the two-year network modernization program the company started in 2011. PLDT has maintained its dividend payout ratio at 100%.
Standard & Poor’s base-case scenario for PLDT assumes the debt-to-EBITDA ratio of about 1.6x, debt-to-capital ratio of about 48%, and the ratio of funds from operations (FFO) to debt above 50% over the next three years. Our projections are based on the following assumptions:
-- Revenue will grow by about 12% in 2012, primarily on account of full-year Digitel consolidation.
-- Revenue growth rate would fall to about 1% in 2013 and 2014. This is based on our expectation that subscribers will continue to grow, but growth would be largely offset by a fall in average revenue per user (ARPU) due to competitive pressure.
-- EBITDA margins will gradually rise from about 48% in 2012 to 50% in 2014 after factoring in the weaker margins at Digitel, gradual easing of competitive pressure, and benefits of synergies and operating efficiency.
-- Capital expenditure will increase to about 21% of revenue in 2012 and then decline to below 20% of revenue starting 2013.
-- We have assumed an investment of PHP6 billion in MediaQuest during 2012.
-- We have assumed 100% dividend payout ratio.
We assess PLDT’s liquidity as “strong,” as defined in our criteria. We expect the company’s sources of liquidity to exceed its uses by more than 1.5x over the next 12 months. We anticipate that PLDT’s net liquidity sources will remain positive even if EBITDA declines by 30%. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include cash and short-term investments of PHP39.2 billion and unused credit facilities of about PHP6.9 billion as of Sept. 30, 2012.
-- The sources also include our projected FFO of about PHP65 billion over the next 12 months.
-- Uses of liquidity include debt maturities of about PHP23 billion as well as maintenance and other capital expenditure of about PHP20.0 billion and projected dividends of about PHP20.0 billion, which we expect the company to incur and distribute, respectively, even in case of stress.
The company also has significant headroom in its covenants. PLDT’s foreign currency risk exposure is moderate, in our view. As of Sept. 30, 2012, 44% of the company’s total consolidated debt is denominated in foreign currency, and about 30% of this amount is unhedged. Interest rate risk is limited because more than 70% of PLDT’s debt is based on fixed rates.
The stable rating outlook on PLDT reflects the stable outlook on the sovereign rating. It also reflects our expectation that PLDT’s operating performance will be stable and that the company will generate positive free operating cash flows in at least the next two years.
We could raise the foreign currency rating on PLDT if we raise the ‘BBB-’ T&C risk assessment for the Philippines.
We could lower the foreign currency rating if we lower the T&C risk assessment for the Philippines to ‘BB+'. We could also lower the rating if the company’s cash flow protection deteriorates, possibly stemming from shareholder return initiatives. A debt-to-EBITDA ratio of more than 3x could indicate such deterioration. We could also downgrade the company if it significantly expands into sectors that are exposed to the uncertain operating and regulatory environment in the Philippines.