PLDT: Lackluster Outlook, Reasonable Valuations (NYSE:PHI)

Elevator Pitch

My rating for PLDT Inc. (NYSE:PHI) [TEL:PM] shares is a Hold. I reviewed PLDT’s financial results for the first quarter of this year in my earlier write-up for PHI published on May 9, 2023.

With this latest update, I find that PHI’s near-term prospects aren’t exactly exciting, but the stock is reasonably priced considering both its EV/EBITDA metric and the consensus EBITDA growth estimates. This explains why I have stuck to my existing Hold rating for PLDT.

Decent Q2 Earnings Growth Didn’t Boost PHI’s Share Price Performance

On August 3, PLDT issued a 6-K filing revealing the company’s Q2 2023 financial performance. Net profit attributable to shareholders for PHI grew by a reasonably good +10% YoY from PHP16.8 billion in Q2 2022 to PHP18.5 billion for the most recent quarter.

But PHI’s stock price corrected by -10% from $23.13 as of August 3 to close at $20.79 at the end of the September 7 trading day. During the same time frame, PLDT’s consensus forward next twelve months’ EV/EBITDA multiple de-rated from 5.5 times to 5.3 times as per S&P Capital IQ’s valuation data.

I will explain what contributed to PLDT’s weak stock price performance in the past one month in the subsequent sections of the article.

Service Revenue And EBITDA Growth Guidance Were Disappointing

PHI’s +10% YoY headline earnings expansion for Q2 2023 (as highlighted in preceding section) was mainly driven by lower depreciation expenses rather than revenue growth acceleration.

PLDT’s depreciation & amortization costs decreased significantly by -56% YoY from PHP28.2 billion for Q2 2022 to PHP12.3 billion in Q2 2023. The company explained at its Q2 2023 earnings call that its most recent quarterly bottom line benefited from “an accelerated depreciation of certain assets” in fiscal 2022. In fact, PHI’s top line growth (in local currency or PHP terms) slowed from +6.8% in Q2 2022 and +5.1% in Q1 2023 to +1.8% for the second quarter of this year.

As such, it is unsurprising that PLDT lowered both the company’s full-year FY 2023 service revenue and EBITDA growth guidance from the “mid single-digit” percentage earlier (during Q1 2023 earnings release) to “low single-digit” percentage after it reported Q2 2023 results.

While PHI’s FY 2023 telco core income guidance in the PHP33.5-34.0 billion range translates into a growth rate of between +1.5% and +3.0%, the company’s bottom line increase this year is expected to be driven by non-cash (i.e. accelerated depreciation last year) and non-core (i.e. the sale of telecommunications towers) items.

In the next two sections of this article, I outline the specific challenges for PLDT’s mobile and broadband businesses.

Mobile Business Was Impacted By SIM Card Registration

With my prior May 2023 article for PHI, I highlighted that “new (mobile) subscription growth for PLDT (in Q1 2023) was negatively affected by the introduction of mandatory SIM card registration” in the Philippines.

At the company’s second quarter results briefing, PHI noted that it had lost mobile subscribers (who didn’t register before the deadline) equivalent to about 4% of its prior revenue as a result of the new SIM card registration requirement in its home market.

Looking forward, it will be reasonable to assume that it will be challenging for PLDT to compensate for this recent mobile subscriber loss and reignite the mobile business’ revenue growth. The new SIM card registration requirement in the Philippines makes it tough for mobile players in the country to win over subscribers from their competitors, and this is reflected in PHI’s subscriber retention metric. PLDT disclosed at its most recent quarterly results call that its mobile subscriber churn rate for the first half of this year fell by -35% YoY.

In other words, PLDT will have to try its best to increase mobile subscriber ARPU (Average Revenue Per User) in a bid to expand the mobile business’ top line, as meaningful subscriber share growth becomes difficult going forward. But ARPU expansion efforts could come at the expense of higher investments and costs relating to marketing and network quality improvement.

Home Broadband Business’ Growth Has Stalled

Local news media Philippine Daily Inquirer reported earlier in July that PLDT is considering a venture into the “prepaid fiber space after competitors recently launched their own products catering to the low-income segment.” Separately, PHI cautioned at the company’s Q2 2023 earnings briefing that it will be “very targeted in our approach” relating to a potential introduction of prepaid fiber offerings to “ensure that we don’t necessarily drive further commoditization of the (broadband) sector.”

The piece of news referred to above and the company’s recent management commentary send a clear message that the home broadband market in the Philippines isn’t growing as fast as it did in the past. PLDT’s recent metrics associated with the company’s home broadband business also tell the same story as highlighted below.

The total number of broadband subscribers for PHI decreased by -2% from around 4.0 million at the end of last year to roughly 3.9 million as of end-Q2 2023. PLDT’s broadband revenue increased marginally from PHP15.0 billion in Q1 2023 to PHP15.1 billion for Q2 2023.

Concluding Thoughts

PLDT’s shares are fairly valued, which justifies a Hold investment rating for the stock. PHI’s outlook isn’t great, but this is already in the price. The company’s consensus FY 2022-2026 EBITDA CAGR is +4.0% (source: S&P Capital IQ), and this is aligned with PLDT’s mid single-digit forward EV/EBITDA multiple.