Philippine Long Distance Telephone Co (also known as PLDT) (NYSE:PHI) is a good way for those who want to play an emerging markets income stock. PLDT has become the beneficiary of San Miguel (OTCPK:SMGBY) selling off its spectrum, as I outlined in my recent bullish article on that company.
That article also outlined the strengths of the Philippines economy with its record of growing over 6% per annum. Two recent events are very positive for PLDT. It has confirmed it will continue to pay a dividend of more than 9% and it has just been given new spectrum and thus a continuation of its duopoly in the telecoms sphere.
The Philippines Telecoms Market.
The sale of San Miguel's spectrum consolidates the strong duopoly of the country's two existing players, PLDT and Globe Telecom. The industry was deregulated in 1992 but the two operators have been constantly criticized for their perceived poor service, high cost and for the slow speed of broadband in the country.
The 700 MHz spectrum they have acquired from San Miguel's subsidiary Vega Telecom for 69.1 billion pesos (about US$1.4 billion) will give them some strong technical uplift. Their current 850 MHz, 2500 MHz and 3500 MHz had made it difficult for them to expand geographically around this large and diverse country. Additionally their current spectrum had lacked penetration in heavily urbanized areas.
The new Philippines President Rodrigo Duterte has warned the two telecom players to improve their performance, but seems to have supported the deal. At the time of writing the sale is reported to be under investigation by the Philippine Competition Commission (PCC). So investors may want to await the result of this. Any ruling against the deal is unlikely, but if it were to happen it would no doubt hit the PLDT share price.
There's a political risk under the new president that he might long-term encourage a third telecoms operator to increase competition and hopefully efficiency. One major income generator for the Philippines economy is BPO (Business Process Outsourcing) which employs 1.2 million people in the country. This needs improved telecommunication speeds and operation to keep the industry competitive.
Both PLDT and Globe wasted little time to act on the deal. Within a week of the sale in early June, both had cell sites up and running in the 700 MHz frequency.
PLDT fired up LTE cell sites in Manila and in Davao. The capital city of Manila was obvious but the choice of Davao on the southern island of Mindanao is interesting. It is the power base of the new President, far away from the old political and business elite centered on Manila. PLDT no doubt knows where the new realities lie.
The company announced that they will activate 360 new cell sites by the end of the year. These will be in Manila, Davao and Cebu. Cebu is the second city of the Philippines and a center for the BPO sector.
Already PLDT had set out a capex budget of 43 billion pesos for the year. This was targeted mainly to improve data coverage and capacity. The requirements of the new spectrum from San Miguel will increase this capex by a further 4 to 5 billion pesos.
PLDT The Company
Ironically PLDT may have benefited from its previous lack of efficiencies. Established in 1928, it has always been very strong in fixed line business. This may be seen as one reason for its relatively slow growth rate in recent years. It gets 63% of its revenues from mobile through its subsidiary Smart Communications Inc, slightly less than rival Globe Telecom.
Rating agencies were somewhat mixed in their reactions to the deal. Fitch Ratings warned about increased debt-to-income levels but were positive. Moody's narrowly maintained its rating of Baa2 but said it would keep its eye on company leverage. This is set to rise to the 2.5x range by the end of the year.
PLDT took a hit earlier in the year with the announcement of losses in foreign investments, as I detailed in an earlier article. This led to a one-off write-down and the cancellation of a special dividend. Losses from this seem to be in the rear view mirror now. It does however renew again uncertainties about the quality of PLDT's senior management. The company has had a reputation of being slow-moving and happy to rest on its traditional business.
There have however been a lot of management shake-ups in the past year. The company has stated that it is under a three-year transition from a legacy business to a digital business and this new spectrum deal should help it to strengthen its position in mobile. Historically it has relied on its legacy business of domestic and international voice services, along with text messaging. In today's world though, people talk on the phone a lot less and send fewer text messages.
At a ceremony this week, the company gave more details on these changes. The picture below shows CEO Manuel V.Pangilinan (with microphone) with senior executives at the event, and illustrates the new company logos.
Corporate logo releases always involve a good deal of potentially pretentious corporate speak. Local social media took aim quite rapidly at these ones. The triangular shape (the Greek letter "delta") is supposed to represent a symbol for change. The three sides represent customers/people/technology. Along with the new logo, the company will change its name from "Philippine Long Distance Telephone Co" to "PLDT Inc."
Under their "roadmap" the company sees itself as "the Digital Telco" and states:
"The PLDT Group is uniquely positioned to provide the customer a total digital experience by leveraging on the breadth of our fixed and wireless network infrastructure, products and services, including new business models in the e-commerce/big data space."
The company also has announced plans to build a new 10 billion pesos headquarters building in Manila. This would being together the different companies in the Group under one roof. That is, PLDT, Smart Communications Inc and Voyager Innovations Inc. The last of these has been spear-heading the company's moves into digital services which are now the Group's focus.
PLDT has been a regular and consistent dividend payer for many years and there is no reason to doubt the ability and the desire to continue with this. The yield is currently at 9.32% paid on a semi-annual basis. This could even increase with the reinstatement of the "special dividend" in the future.
One concern with developing markets is always the currency risk. The Philippines Peso has though stood up better than most emerging markets against the US dollar in the past year.
One reason for this relatively good performance of the peso is that unlike many emerging markets, the Philippines does not rely on commodity exports for income. Other emerging markets have borrowed heavily against commodity exports which have fallen in value, leading to declines in the value of their currencies. The Philippines as an energy importer has also gained by the bearish trend in oil prices.
So the dividend should remain a good source of income for overseas investors both in percentage terms and in US dollar terms. One uncertainty for the value of the peso against the US dollar is what the Federal Reserve will do next. A raising of rates in the US is likely to draw capital from emerging markets into the US. This then weakens their currencies and raises their bond yields.
There is however good potential for long-term capital gains as well as regular income accrual for the patient investor.
The stock price graph for the last six months illustrates firstly the negative effects of the write-off for the overseas investment and secondly the positive effects of the San Miguel spectrum deal.
At the time of writing the stock price was at US$42.61. The 52-week range is US$34.26 to US$68.00 and there is little reason why the price could not test that 52-week high within the next 12 months. PLDT specifically should benefit from rising consumer demand and increased BPO business as well as increased tourism. The forward P/E is reasonable at 13.06. This in fact reflects the generally low P/E ratios right now in emerging markets compared to North America and Europe. Short interest is just O.3%. As an ADR (American Depositary Receipt) on the NYSE the company is easy to trade and has to comply with certain reporting requirements.
There are always some uncertainties in what might happen in The Philippines. A risk is the political and thus economic uncertainty of a new President, but the macro risks to the economy seem quite limited. The San Miguel spectrum deal and the growing economy should enable PLDT to increase profitability and see stock price gains.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.