March 05, 2014

PLDT posts 5% hike in 2013 core income

PLDT (TEL, Buy) yesterday announced core net income of P38.7b in 2013, up 5% YoY and slightly beating the company’s P38.5b guidance and the P38.3b market consensus forecast. Reported net income, however, dropped 2% YoY to P35.4b owing to lower gains from asset sales (P2.1b in from sale of Philweb shares in 2013 vs. P3.8b from sales of Beacon preferred shares and the first tranche of Philweb shares in 2012), higher net forex and derivative losses (P3.7b pre-tax), P1.3b effect of PAS adoption on booking on manpower reduction program expense and P0.9b in losses from damages wrought by the supertyphoon. Without the provision for damages from the typhoon, reported net income would have been flat.

The company is expecting to book insurance recoveries on the typhoon damages within 2014. In the meantime, the TEL declared P62/sh in final cash dividends on the 2013 core income and P54/sh in special dividends (record date: 14 March, payable 4 April). This brings total cash dividends on the 2013 income to P179/shvs P176/sh consensus forecast. Our take: In all, we found the results encouraging especially with the 8% YoY and 6% QoQ growth in 4Q core income despite the notable weakness in demand and business disruptions during the quarter in the aftermath of the strong typhoon that hit the country.

Sales and marketing costs as well as tax provisions are also usually elevated in 4Q. Notwithstanding additional transport and repairs and maintenance costs due to the typhoon, consolidated EBITDA managed to grow 3% on higher service revenues and lower cash opex due to a significant cut in manpower reduction expenses to P0.6b from P3.8b in 2012. More importantly, consolidated EBITDA margin was also steady at 47% in 2013 despite the challenging business environment with wireless EBITDA posting just a slight decline (47% from 48% in 2012) but offset by an improvement in fixed line EBITDA margin to 36% from 34% in 2012. While overall cellular subscriber base was relatively flat (net gain of just 179,169 in 2013 from 6.17m in 2012) due to the a temporary disruption in distribution amid the integration of Smart and Sun networks and also the exclusion of about 2m subscribers in the count.

The latter were not considered by the company in the count as their minimum balances were derived from accumulated rewards credits. Notwithstanding the challenges in the prepaid cellular business, prepaid revenues (82% of total cellular revenues) were relatively flat. More noteworthy is the 15% jump in postpaid revenues which now account for 18% of total revenues (from 16% in 2012). This indicates that the company’s initiatives in the postpaid business are paying off not only in terms of defending market share but also in growing its postpaid business. Efforts are now in place to improve ARPUs, including offering greater variation in postpaid plans, additional prepaid packages that bundles data to the usual call-SMS plans as well as offering low-denomination data sachets.

 However, the company pointed out that capacity and bandwidth for the data sachet offering for the prepaid market will be limited so as not to sacrifice the quality of service to the postpaid subscribers and avoid the problems faced by a competitor. We gather from the CFO that capex will remain elevated over the next three years at about P31-32b/year from P28.8b in 2013 to support continued LTE and 3G rollout and in light of the company’s initiatives to lay its cable below ground to minimize potential damages in the event that the country will be hit again by strong typhoons. At any rate, the elevated capex will still fall within an acceptable 18-20% of service revenues.

This should also ease in case the peso strengthens further. We do not see the elevated capex as a threat to the company’s high dividend payout amid growing EBITDA, and the preference for debt financing which its balance sheet can accommodate given its 0.93x net debt/EBITDA (from >1% previously). Debt maturities over the next three years are also manageable (declining from US$344m this year to US$376m in 2017). Given normalizing expenses post the rehabilitation from the typhoon damages, free cash flow should also improve. The company is guiding for a 2% hike in core income this year to P39.5b which can translate to around P183/sh in cash dividends assuming a full payout. We are keeping our Buy rating on TEL given the improving prospects.– WealthSec