2023-06-30 09:32:04 ET
Summary
- PLDT is the oldest and largest telecommunications company in the Philippines and has seen a decline in price by >25% in the past year. This has increased the dividend yield to nearly 9%.
- The upcoming SIM registration deadline in the Philippines could potentially impact PLDT's revenue, with an estimated 18-20% of users possibly not registering could result in a drop in revenue.
- Inflationary pressures are another concern for PLDT, as average revenue per user (ARPU) has decreased across all lines from Q4 2022 to Q1 2023.
- A favorable resolution to the SIM registration impact and inflation impact, at or below the current share price, would flip me from hold to buy.
PLDT Inc. (PHI), founded in 1928, is the Philippines' oldest and largest telecommunications company. PLDT operates in the telecommunications industry, providing various services, including fixed-line, cellular, and broadband. They offer home broadband services, mobile connectivity, and multimedia content for individual consumers and families. For businesses and enterprises, they provide digital solutions that simplify complex business processes and improve productivity.
PLDT has had a challenging year, and the stock price is down more than 25%, with most of the decline coming in 2023. You know things are bad when management calls a quarter "very tough" during an earnings call . On the plus side, the decline in stock price has driven the dividend yield up close to 9%.
While I believe investors should hold PLDT today, I am borderline buy on the stock with the excellent dividend yield, depressed valuation multiples, and steady (if slowing) revenue and profitability growth. I am concerned about the impact of the upcoming July SIM registration deadline on revenue; note that management declined to provide earnings guidance for this reason. I am also worried about the impacts of inflation. If PLDT signals that they are overcoming these challenges in the next quarter, I would feel more bullish on the stock.
Stock Looks Undervalued On Fundamentals
The quant ratings currently show a weak hold, driven by negative earnings revisions. I can get past the earnings revisions (as well as momentum) as they largely result from uncertainty around SIM registration, which received a last-minute extension in April. Average growth in telecom isn't all that unusual, and a high valuation rating deserves further research.
PHI Quant Rating (Seeking Alpha)
On the valuation side, key multiples are depressed versus the sector and PLDT's 5-year average. Most notably, P/E of 6.27 is down 64.8% to the sector and 40.8% to the 5-year average, while EV/EBITDA of 5.30 is depressed by 37.3% to the sector and 7.1% to the historical average. Given similar headwinds across the sector and PLDT's new business ventures in the past 5-year, these both signal to me that the stock is potentially undervalued.
Looking at the attractive 9%+ dividend yield, PLDT has raised the dividend continuously for four years, beating the sector median of 1 year. The Seeking Alpha dividend safety rating of D- is heavily weighted down by debt, but ratings on cash generated by the operation (my first step in evaluation) are in the A- to B+ range. Management did not disclose any near-team liquidity events beyond a small US litigation in their earnings.
Lastly, despite the challenging environment in the telecom industry (especially with the regulation in the Philippines), PHI has maintained a growth trajectory for both revenue and profitability.
PHI Q1 2023 Growth (main.pldt.com/investor-relations)
This is an attractive mix for a large telecom company and presents significant upside potential to the stock price, not to mention the cash flow if the dividend is maintained.
SIM Registration Deadline Could Impact Revenue
The Philippines has implemented a SIM card registration requirement under Republic Act No. 11934, also known as the SIM Registration Act (SRA). This law mandates that all SIM card owners, whether new or existing, register their SIM cards with their respective telecommunication providers. The deadline for registration was extended from April 2023 to July 2023, a hard deadline written into law.
In the Q1 2023 earnings call , management provided some details in response to an investor question that can help us size the risk. As of May 3, 2023, they registered 67% of users, representing 80% of revenue. They expect another 13-15% of users to register by the deadline. This still leaves 18-20% of users potentially falling off. Management commented that users who don't register will likely have the lowest impact on revenue. Wireless revenue could fall by as much as 5-10% or upwards of PHP 1 billion.
This will have a disruptive impact on the entire industry, not just PLDT, but I believe investors should still wait and see how this plays out. It is important to note that in both the Q1 earnings call and the press release , management declined to provide earnings guidance due to the impacts of this law.
Pricing Isn't Keeping Pace With Inflation
Much like the rest of the globe, the Philippines has been experiencing high inflation, with average inflation over the last 12 months at 7.5%. Fortunately, the same article notes inflation has slowly backed off to the low 6% range. However, PLDT still needs to overcome the effects of inflation on its cost base.
The good news is that PLDT has been aggressively focused on cost. In the last earnings presentation , operating expenses dropped 8% year-over-year, driven mostly by lower compensation. With the cost savings efforts in place, and limited opportunities remaining according to management, driving pricing growth is necessary.
On the pricing side, the news is not so good. ARPU decreased across every line from Q4 2022 to Q1 2023 and in the critical postpaid business year-over-year. To maintain customers, it looks like PLI has to give up rate, which can quickly pressure the margin if inflation continues at the same rate.
PHI Q1 2023 ARPU (main.pldt.com/investor-relations)
Without earnings guidance and with the focus of earnings on SIM registration, it is difficult to understand if management has considered inflation and how they see it impacting the business. ARPU trends into Q2 2023 will be critical for investors to monitor.
Verdict
Given the depressed valuation multiples and steady growth, I believe investors should consider holding PLDT stock today. While I am borderline buy on the stock due to its attractive dividend yield, some key risks could still impact revenue in the short term, including the upcoming SIM registration deadline and inflationary pressures. Without management earnings guidance setting a price target would be arbitrary. A favorable resolution to the SIM registration impact and inflation impact, at or below the current share price, would flip me from hold to buy. If management signals that they are overcoming these issues in the next quarter, I would become more bullish on the stock. I will closely monitor the next quarter to see how the risks play out.
For further details see:
PLDT's Future Depends On SIM Cards