November 07, 2014

PLDT's 9M14 results came in lower than expected

Philippine Long Distance Telephone Co (PLDT) has lowered its core income guidance for 2014 by 6% to P37b from P39.5b previously after reporting 3Q14 results that came in lower than expected. PLDT announced 9M14 core income fell 1% to P28.56b, a reversal from the 2% growth posted in 1H14, as 3Q14 earnings declined by 7% to P8.73b due to higher cash operating costs (+6%) and provisions for income taxes (+59%). Revenues came in at P127.27b in 9M14, higher by 2.2% and represents 74% of our full year estimates. Top line growth, however, slowed to 0.6% in 3Q14 because of lower wireless voice (-3%) and SMS revenues (-12%). Non-SMS data revenue, however, remain strong, up 16% in 9M14 and 15% in 3Q14, boosted by higher mobile internet, wireless broadband and fixed line data revenues.

With the continued focus on expanding the growing data business, PLDT has raised its capex guidance to P34.5b (or over 20% of service revenues) from P31-32b (18-20% of service revenues). Mobile internet usage, in particular, has more than doubled in 3Q14 and is expected to rise further with the recent launch of PLDT’s free internet promo last September. Revenues from this segment have been growing strongly, increasing by 69% to P5.73b in 9M14.

Cash operating expenses grew by 6% in 9M14 principally due to higher repairs and maintenance costs as well as selling and promotions expense. The company attributes the 15% rise in repairs and maintenance expenses to higher site electricity consumption costs, gas and fuel consumption for site, maintenance costs on cellular and broadband network facilities, as well as higher IT hardware. Meanwhile, selling and promotion expenses rose by 20% mainly due to higher costs of events, advertising and commissions expenses.

Our take: The lower profit guidance for 2014 implies a further deceleration in 4Q14 earnings to around P8.4b or 15% below P9.9b in 4Q13. Revenue growth may recover, spurred by the IPhone 6 launch in mid-November, but this will be negated by a corresponding rise in subsidy, selling and promotion expenses. Meanwhile, PLDT also said capex will remain elevated over the next two years, with the 2015 capex probably coming at up to 10% higher than the upgraded 2014 capex.

Management said there is no change in PLDT's dividend payout policy (75% of previous year's core income + a "look back" component. Over the past several years, this policy has consistently brought payout to 100%. However, the lower profit guidance and higher capex can put pressure on cash flows which will have negative implications on the "look back" component and may bring down the overall dividend payout. On this note, the company is looking at possible sale of some real estate and non-core investments to boost its cash flows and meet both debtor metrics and support dividend payout. We will review our numbers to take into account the weaker results (the 9M14 bottomline was just 72% of our full-year forecast) and the new capex guidance. – WealthSec