Let us take advantage of PLDT's (NYSE:PHI) negative momentum. This Communication Services-related stock has a 6-month price slide of -15.15%. PHI is now relatively undervalued than its sector peers. The pessimism over PHI is due to Pres. Duterte's July 2020 expropriation warning against PLDT.
(Source: Seeking Alpha Premium)
There's no presidential expropriation order coming against PLDT anytime soon. PLDT has vastly improved its services after Pres. Duterte's rant. PLDT now has over 2,600 5G cell sites. PLDT's fully-owned subsidiary, Smart Communications, is acknowledged as the 5G leader in the Philippines with 190mbps median download speed. PLDT even implemented Smart's 5G mobile broadband service in our small town.
(Source: Councilor Marie Foronda)
Why Dito Is Not A Real Threat
This article should dispel the bears' argument that increased competition is why they are down on PHI. PLDT's dominant 48% market share in fixed broadband and 42% share in mobile broadband are not threatened by Dito Telecommunity. Becoming the third wireless carrier in the Philippines is a capital-intensive undertaking that Dito Telecommunity might not be able to fulfill.
Due to financing difficulties, Dito was only able to do its commercial launch last March 8. Pres. Duterte's term will end on June 30, 2022. Dito will soon lose its political patron. The National Telecommunications Commission of the Philippines might no longer be super-lenient on Dito after Pres. Duterte is out of office. Dito's mission to grab 30% market share is greatly in doubt.
Dito only came about because Pres. Duterte is very close to Davao-based businessman Dennis Uy. In a backdoor deal, Mr. Uy created a new company, Dito CME Holdings Corp to get 60% of Dito Telecommunity. China Telecom gets the remaining 40%. Fortunately for PLDT shareholders, Dennis Uy's business empire is highly-leveraged through debt. The pandemic is affecting his several companies, Mr. Uy is already selling assets to pare down his Udenna Group's debt load.
The debt-fueled business expansion approach of Mr. Uy is not going to inspire state-owned Bank of China to extend more loans to Dito Telecommunity. Bank of China already lent $500 million so that Dito can start fulfilling its P283.7 billion ($5.56 billion) 5-year spending commitment.
Since Pres. Duterte is on his way out, Philippine senators are now questioning Mr. Dennis Uy's $460 million takeover of Royal Dutch Shell's (RDS.A) (RDS.B) 45% stake in the Malampaya gas field venture. Mr. Uy made a new company, Malampaya Energy XP Pte, Ltd., allegedly with a capitalization of only 5,000 pesos ($100), to win that $460 million deal.
That $100 capitalization likely pissed off losing bidders like PLDT Chairman Manny Pangilinan and San Miguel Corp. (OTCPK:SMGBY) President Ramon Ang. Unless Mayor Sara Duterte replaces her father as president next year, Dennis Uy-controlled companies could suffer from the wrath of Filipino billionaires whom Pres. Rodrigo Duterte waged war on.
PLDT's Finances Are Healthy
Unlike the doubtful finances of Dito CME, PLDT touts a healthy balance sheet. Compared to its co-duopoly rival, Globe Telecom (GTEMF), PLDT has better cash flow and balance sheet numbers. PLDT's credit rating is still BBB.
(Source: Seeking Alpha Premium)
As of June 2021, Dito has 1 million prepaid/postpaid mobile subscribers. PLDT ended Q1 2021 with 71.8 million mobile subscribers. More than 71 million PLDT mobile subscribers are behind PHI's strong net operating cash flow of $1.76 billion. PLDT has no urgent need for new loans to expand its business.
(Source: PLDT.com IR)
Dito managed to get 1 million customers because of its deceptively-cheap promos. Some Filipinos got ensnared by Dito's prepaid P99 ($1.98) 10GB data for 30 days promo.
(Source: dito.ph)
Dito's marketing gimmick is not going to fool many Filipinos. Smart Communications is offering unlimited 4G/5G data for P99 ($1.98) for 7 days. PLDT's stronger balance sheet and hefty cash flow allow it to match any marketing promos of Dito and Globe Telecom.
How About Converge?
PLDT has a worthy rival in Converge ICT. Converge touts 1.182 million fixed broadband subscribers. Converge can steal from PLDT's 2.4 million-strong fixed broadband customers. Converge's IPO last year raised $523 million service. Converge's core business is fixed broadband fiber internet service. PLDT's P92 billion ($1.84 billion) capex for 2021 is still larger than Converge's 2021 capex of P20 billion ($400 million).
PHI is a buy because PLDT is faster than Converge when it comes to fiber-to-the-home deployment. PLDT Home Fibr is available in our town. PLDT's Unli Fibr 200mbps monthly plan costs P3799 ($78). Expensive but it is giving me download/upload speed higher than 300mbps. The speed test result below is in spite of the 402 kilometers distance between our town and Quezon City.
(Source: Motek Moyen)
Converge's Fiber X is not yet available in Northern Philippines provinces. PLDT can outspend and easily outplay Converge. The chart below says Globe Telecom remains the real threat to PLDT's fixed broadband business.
(Source: Statista.com)
Globe Telecom's P70 billion ($1.4 billion) capex for 2021 is for building 2,000 towers and 1 million fiber-to-the-home lines. It is almost August but Globe's fiber internet service is still not yet available in northern Luzon provinces.
PLDT Deserves Fair Treatment
PHI is undervalued compared to its American peers, T-Mobile (TMUS), Verizon (VZ) and AT&T (T). This is not fair. PLDT operates in a developing country. PLDT has better growth potential than Verizon and AT&T have in the already-saturated market of North America. PHI's forward P/E is only 9.83x, notably lower than T's 11.14x. PHI's TTM Price/Sales valuation is only 1.41x. This is lower than VZ's TTM P/S of 1.75.
(Source: Seeking Alpha Premium)
PLDT has a higher gross margin than Verizon and AT&T, 78.66% versus 58.66% and 51.75%. PHI's 3 Year Revenue CAGR of 4.74% is also higher than Verizon's 0.82% and AT&T's 3.58%. PLDT's 3-year net income CAGR is 16.42%, which is far better than Verizon's -13.56%.
(Source: Seeking Alpha Premium)
If we assume that PHI can wrap up FY 2021 with an EPS of 2.82, and give it a Forward P/E valuation of 11x (like what AT&T has), PLDT's stock should be forward-priced at $31.
PLDT's annual EPS performance suffered after Pres. Rodrigo Duterte's 2016 electoral win. Let's hope that Pres. Duterte's exit next year can help PLDT deliver annual EPS of $3.50 - $4.50. PLDT did this during the 2005-2014 period. PLDT's -24.75% total return since my first PHI article also coincides with Pres. Duterte's reign. PLDT's fortune was punished by an unfriendly politician.
Conclusion
PHI's low valuation makes it an affordable investment on the Philippines' 89 million social media users. PLDT's long-term prosperity and profitability is assured. For six consecutive years, Filipinos are the world's most industrious social media and internet users. Filipinos spend an average of 4 hours and 15 minutes every day on social media.
Those 71.8 million Smart subscribers built a big moat around PLDT's 78.66% TTM gross margin.
(Source: Seeking Alpha)
Smart's affordable $1.98 prepaid unlimited 4G/5G data for 7 days also protects PLDT's 42% market share in mobile broadband. PLDT is not afraid to engage in pricing wars.
The continuing pandemic could do more harm to Mr. Dennis Uy's debt-laden business empire. Dito Telecommunity's 5-year, $5.56 billion roadmap can get derailed if Mr. Dennis Uy cannot consistently raise more loans. My fearless forecast is that without Pres. Duterte's political patronage, Dito could sink quickly. Anything that might kill emerging rivals is good for PLDT.
This article was written by
Motek Moyen is a financial analyst, technician, and Adobe multimedia content creator. He studied Mathematics, Commercial Advertising, and Computer Science in the 1990s. He does not trade stocks.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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