PHI - PLDT: A Closer Look At Data Center And Mobile Businesses

2023-11-27 11:01:35 ET

Summary

• The long-term growth prospects for PHI's data center business are good, but this business only represents a small percentage of the company's overall revenue for now.
• Dito Telecommunity, the new player in the Philippines' mobile market, has secured new equity and debt funding in recent months to support its growth plans.
• PHI shares are still rated as a Hold after my review of PLDT's mobile and data center businesses, as I don't see compelling reasons to turn bullish now.

Elevator Pitch

I still award a Hold rating to PLDT Inc. ( PHI ) [TEL:PM] stock.

Previously, my September 10, 2023 article touched on PLDT's full-year financial outlook. I turn my attention to PHI's data center and mobile businesses in the current article.

The competitive threat posed by new entrant Dito Telecommunity in the wireless space might become more substantial going forward. I have a favorable opinion of PLDT's data center business, but this will likely only be a long-term growth driver (rather than a short-term catalyst) for the company. The above-mentioned factors support a Hold rating for PLDT.

Data Center Business Will Be A Key Growth Driver For PLDT In The Long Run

PHI's total service revenues increased by a modest +1% YoY to PHP142.3 billion in the most recent quarter as disclosed in its Q3 2023 results presentation slides . In contrast, the top line for PLDT's ICT (Information And Communications Technology) segment grew by +10% YoY to PHP3.5 billion for the third quarter of this year. In particular, the data center business, which is part of the company's ICT segment, saw its sales expand by +8% YoY to PHP2.3 billion in Q3.

An Overview Of PHI's Data Center Business

In a nutshell, data center is a fast-growing business within PLDT that currently accounts for a very small proportion (1.6%) of the company's service revenues.

There are a number of reasons for my expectations that PLDT's data center business will continue to grow rapidly going forward.

The first reason is that PLDT has sufficient capacity to cater to industry demand. In its third quarter results presentation, PHI highlighted that it has ten data centers in operation with a total capacity which it claimed to be the "largest in the market." According to an October 12, 2023 news report published by local media publication The Philippine Star , the company already has plans for a 13th data center.

The second reason is that PHI expects to "be the first to market, to actually have a hyperscale data center in the country (the Philippines)" as per the company's management comments at the Q3 2023 earnings briefing . Specifically, PLDT is referring to its 11th data center which is targeted to be up and running before June of next year.

The third reason is that the company is currently seeking to enter into partnerships that can boost the future growth of its data center business. At its third quarter earnings call, PLDT shared that it is "looking for a strategic partner that will grow the (data center) business and operate it more efficiently." This implies that it is reasonable to expect higher revenue and an improvement in profitability for PHI's data center business, assuming that it can collaborate with the right companies.

In summary, I see the data center business expanding fast and accounting for a growing proportion of PLDT's top line in the quarters and years ahead. But it must be noted that the data center business is more of a long-term growth driver, as its current revenue share (1.6% of Q3 2023 service revenues) isn't significant yet.

Entrant In The Mobile Segment Is Gaining Momentum

The Philippines wireless or mobile market used to be a duopoly between PLDT and Globe Telecom, Inc. ( GTMEF ) ( GTMEY ), before Dito Telecommunity entered the market in March 2021 with the introduction of commercial services.

At PHI's Q3 2023 results call, PLDT noted that "a number of the customers have actually gone back to their primary service providers after understanding that the service is more reliable" after "trying to experiment" with a new mobile services provider. It is encouraging to know that PLDT's network quality appears to still be superior to that of the new entrant, but PHI's comments are also an acknowledgement that there is subscriber churn driven by competition from Dito Telecommunity.

But there are signs that Dito Telecommunity could be posing a bigger threat to PLDT and Globe Telecom in time to come.

According to an October 27, 2023 article published in local media BusinessWorld , Dito Telecommunity was deemed to be better than its more established peers (Globe Telecom and PLDT's Smart brand) in specific categories like "Games Experience, Upload Speed Experience, Availability and Consistent Quality" as per research firm Opensignal's analysis.

Separately, Dito Telecommunity's financial position has improved in recent months with new debt financing and new investors. In September 2023, Dito Telecommunity secured a $3.9 billion "15-year long-term project finance facility", according to a report issued by ABS-CBN News. In October this year, Summit Telco, an investor from Singapore, spent PHP3.3 billion (or $60 million) to buy new shares issued by Dito Telecommunity. In other words, Dito Telecommunity has recently gotten critical debt and equity financing to fund investments relating to network quality improvement and the expansion of its existing network.

It is reasonable to be wary of potential downside risks to PLDT's future revenue and earnings, assuming that PHI cedes ground to the new entrant or has to spend more on marketing to protect its market position.

Closing Thoughts

The market currently values PLDT at 5.4 times (source: S&P Capital IQ ) consensus forward next twelve months' EV/EBITDA, which is just +10% above PHI's 3-year EV/EBITDA trough multiple of 4.9 times. Although PLDT's EV/EBITDA metric looks cheap on a historical comparison, I think PHI's valuations are fair and the stock is deserving of a Hold rating. The risk of stiffer competition from Dito Telecommunity is significant, and it will take time for the data center business' revenue contribution to the company to become more significant.

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