GTMEF - PLDT: Recent Share Price Correction Is Justified

Summary

• PLDT Inc.'s shares have done poorly in both absolute and relative terms recently.
• PLDT's stock price underperformance is justified by negative disclosures relating to capital expenditures, its peer's below-expectations results, and the unfavorable outlook for its fixed line broadband business.
• I am of the view that PLDT deserves a Hold rating, as its current valuations have factored in most of the headwinds.

Elevator Pitch

My Hold rating for PLDT Inc.'s (PHI) [TEL:PM] shares remains intact.

The divestment of its telecommunications towers, competition in the wireless segment, and the risks and rewards relating to its digital banking operations were among the items that I touched on in my earlier article for PLDT published on November 2, 2022.

In this latest write-up, I highlight key negatives relating to PLDT such as larger than expected capital spending which exceeded the company's budget, a potential earnings miss for PHI next week, and the fixed line broadband business' challenges. But PLDT's stock is already trading substantially below its long-term historical average based on the EV/EBITDA multiple, which means that its recent share price weakness should have factored in the negatives for PHI. As such, I choose to stick with a Hold rating for PLDT.

PLDT Inc.'s Stock Price Performance

It has been close to four months since my previous update for PHI was written on November 2 last year. During this time period, PLDT's share price has declined by -12.1% from $27.60 at the start of the November 2, 2022 trading day to $24.26 as of February 23, 2023. In the same time frame, the S&P 500 (SP500) actually went up by +4.2% as per Seeking Alpha price data.

In fact, PHI's stock price even dropped to a new 52-week trough of $20.20 during intraday trading on December 19, 2022. Even though the company's shares have staged a meaningful recovery since then, PLDT's stock has still underperformed on both an absolute and a relative basis in recent months. In the subsequent sections of this article, I write about the potential reasons for PHI's unfavorable stock price performance.

PLDT's Actual Capital Expenditures Exceeded Budget As Per Investigation

In the preceding section, I highlighted that PHI's shares fell to a one-year low on December 19 last year. This was the same day that PLDT revealed a "PHP48 billion capex (capital expenditures) budget overrun" was discovered as part of an internal investigation. The disclosure relating to higher than expected capital expenditures came as a negative surprise for investors, and the company's stock price plunged by -23.7% on the December 19, 2022 trading day.

PLDT subsequently issued an announcement on December 22, 2022 highlighting that there was "no fraud, no anomalies, no evidence of overpricing, and no unrecorded transactions in relation to the (capital expenditures) overrun." In addition, PHI stressed in the late-December announcement that the company's full-year fiscal 2022 earnings guidance will be maintained, and noted that it expects to pay out dividends equivalent to a reasonably high 88% payout ratio for 2022. This helped to allay investors' concerns about PLDT's above-expectations capital spending, as PHI's share price rose by +24.7% from $22.21 as of December 22, 2022 to reach a new one-month high of $27.69 on January 25, 2023.

But it is understandable why PLDT's shares eventually closed lower a month later at $24.26 as of February 23, 2023, which was below what the stock traded prior to the December 19, 2022 disclosure. This matter hasn't been fully concluded. There is a possibility of PHI having to restate its prior financials and paying financial penalties relating to the issue. More importantly, it is inevitable that there will be greater scrutiny of PLDT's internal controls and corporate governance practices going forward, which will warrant a valuation discount for the company's shares.

Negative Read-Through From Peer's Recent Results

There are also other factors which have contributed to PLDT's share price decline between late January and late February this year.

PHI's closest peer and rival, Globe Telecom, Inc. ( GTMEF , GTMEY ) reported its most recent Q4 2022 and FY 2022 financial results on February 6, 2023. EBITDA and EBIT for Globe Telecom decreased by -5% QoQ and -27% QoQ to PHP18,774 million and PHP6,415 million, respectively in the most recent quarter.

Globe Telecom's core net income also fell by -37% QoQ and -10% YoY to PHP3,155 million for Q4 2022. According to S&P Capital IQ data, Globe Telecom's full-year FY 2022 top line and EBIT came in -10% and -3% below the market's consensus revenue and operating income forecasts, respectively.

PLDT is expected to announce the company's earnings for the fourth quarter and full-year 2022 next Tuesday, on February 28, 2023 . It is natural to be concerned that PLDT's actual financial numbers for Q4 2022 and fiscal 2022 might fall short of market expectations, considering how its competitor Globe Telecom has performed.

Negative Outlook For Fixed Line Broadband Business

As per metrics disclosed in the company's Q3 2022 earnings presentation slides , PLDT's fixed line broadband subscriber growth has slowed, while this business' ARPU (Average Revenue Per User) is declining.

Net fixed line broadband subscriber additions for PHI decreased from 167,241 in Q1 2022 and 66,745 in Q2 2022 to just 41,098 for Q3 2022. PLDT's ARPU for its fixed line broadband segment also contracted by -3% YoY from PHP1,490 for Q3 2021 to PHP1,448 in Q3 2022.

A vicious cycle is at play here. The moderation in subscriber growth for the fixed line broadband space compels PLDT and its competitors to compete more aggressively on price to compete for new subscribers. But lower ARPUs eventually depress the profitability of the fixed line broadband business, which makes it even more difficult for PHI to spend more on marketing or commit more investments to improve broadband speeds.

Notably, inflation in the Philippines has gone up to as high as 8.7% in January this year, which represents a "14-year high" according to Nikkei Asia's February 7, 2023, article . This suggests that it will be tough for PLDT to expand its fixed line broadband subscriber base substantially at a time where ordinary folks in the Philippines are facing significant cost pressures.

Concluding Thoughts

As detailed in this article, PLDT Inc. is facing a couple of headwinds. But negatives are priced in to a large degree, as PHI's current consensus forward next twelve months' EV/EBITDA multiple of 9.0 times (source: S&P Capital IQ ) is already significantly lower than its 10-year mean EV/EBITDA ratio of 12.8 times. In my opinion, a Neutral or Hold rating for PLDT Inc. is warranted.

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