May 14, 2014

PLDT posts 2% rise in 1Q14 income

PLDT (TEL, Buy) yesterday disclosed a 2% YoY rise in both its 1Q14 reported (P9.4b) and core net income (P9.8b), both tracking company guidance and consensus forecast. Consolidated service revenues grew by 3% to P41.2b, with the fixed line revenues growing 5% and wireless service revenues rising by 2%.

However, cash operating expenses increased by 6% largely due to higher spending on subsidies to acquire more postpaid subscribers that resulted in a 10% YoYhike in selling and promotions costs. This consequently weighed on EBITDA which fell 2% YoY to P19.7b (still within expectations).

EBITDA margin dropped to 48% from 50% in 1Q13 as the drop in wireless EBITDA margin(46% from 50%) outweighed the rise in fixed line EBITDA margin (40% from 37%). Notwithstanding the lower EBITDA and EBITDA margin, free cash flow in 1Q14 rose 37% to P10b, partly driven by lower capex and lower interest costs.

Our take: The headline numbers were largely in keeping with expectations. We anticipate that thecontinued changes in PLDT’s revenue mix in favor of the fast-growing but lower margin data and broadband revenues will limit earnings growth in the near term.

The key takeaway here, however, is that the positive momentum in earnings has been sustained since 2012 (from the two years of successive declines in 2010-2011), indicating that the company’s efforts at restructuring its revenue mix is paying off. But until we see greater contribution from new revenues, we expect margins to remain under pressure. So far, PLDT is gaining ground on this as smartphone subscribers now account for 18% of PLDT’s total mobile subscriber base from 10% in 1Q13.

More importantly, the company has made significant strides in turning the legacy fixed line business(which used to be a drag on earnings) into a more profitable venture given greater subscription to data and broadband services.

In all, we expect the decline in EBITDA margin to raise concerns but we must highlight that the moreaggressive subscriber acquisition started in 2Q13 thus the impact on EBITDA margin is notable until 1Q14. Barring any further increase in subscriber acquisition costs, we expect the margins to stabilize or will fall at a less pronounced rate going forward.

In fact, the 48% 1Q14 EBITDA margin is slightly higher than the 47% average EBITDA margin for 2013. For the wireless segment, the 46% 1Q14 figure is just a tad lower than the 47% average in 2013 but the 40% fixed line EBITDA margin is higher than the 36% full-year average last year. – WealthSec