Philippines-listed Globe Telecom (OTCPK:GTMEY) (OTCPK:GTMEF) [GLO:PM] trades at 5.2 times consensus forward FY2020 EV/EBITDA and offers a 4.6% dividend yield based on its share price of PHP1,960 as of August 7, 2019.
Although the incumbent telecommunications services operators are expected to increase capital expenditure spending and experience increased competition from Dito Telecommunity, I expect the valuation of Globe Telecom to be re-rated positively over time, with increased clarity on Dito Telecommunity's plans and the likelihood that Dito Telecommunity might pose a lesser threat than expected and priced into the Globe Telecom's share price.
I arrive at a target price of PHP2,560 for Globe Telecom based on a 6 times FY2020 EV/EBITDA multiple and including the potential sales proceeds from a spin-off of its tower assets, which implies a 30% upside.
Globe Telecom is an integrated, full-service telecommunications company in the Philippines, offering mobile, fixed, broadband, data connections, internet, and managed services. Globe Telecom is one of the two telecommunications companies operating in a duopoly in the Philippines, the other industry player is PLDT Inc (PHI) (OTCPK:PHTCF) [TEL:PM].
The company's key shareholders Singapore-listed regional telecommunications company Singapore Telecommunications (OTCPK:SGAPY) (OTCPK:SNGNF) [ST:SP] and Philippines conglomerate Ayala Corporation (OTCPK:AYALY) (OTCPK:AYYLF) [AC:PM] own equity stakes of 47% and 31% respectively in Globe Telecom.
Clarity On New Entrant And Third Telecommunications Player Which Faces Inherent Challenges
In the past two years, the valuations of the two Philippines telecommunications operators, Globe Telecom and PLDT, have been hit by ongoing news and developments relating to news of a new entrant and third telecommunications company in the country. Since November 2017, the Philippines government has expressed an intention to end the duopoly in the Philippines telecommunications industry and introduce a new third telecommunications operator. Between November 2017 and July 2019, Globe Telecom has been trading in the 4-6 times EV/EBITDA valuation range, while PLDT was trading in the 5-7 times EV/EBITDA valuation range. In the 2016-2017 period prior to news of a possible new entrant in the telecommunications industry emerging, Globe Telecom and PLDT were trading at comparatively higher EV/EBITDA multiples of between 5 and 7 times, and 6 to 8 times respectively.
On July 8, 2019, Dito Telecommunity Corp, formerly known as the Mislatel consortium, received its operating license (known as the certificate of public convenience and necessity) and radio frequency bands (700 MHz, 2100 MHz, 2000 MHz, 2.5 GHz, 3.3 GHz and 3.5 GHz), to officially become the third telecommunications services operator, with commercial launch expected in 2Q2020. The Mislatel consortium comprises of Mindanao Islamic Telephone Holding, China Telecom (CHA) (OTCPK:CHJHF) [728:HK], Udenna Corporation and its subsidiary Chelsea Logistic Holdings.
Dito Telecommunity has committed to achieving minimum broadband speeds of 27 Mbps and 55 Mbps in the first year and subsequent years of operation respectively. In terms of coverage target, Dito Telecommunity needs to cover 37.03% of the Philippines' population in the first year of operation, and gradually ramp up coverage to 84.01% within five years. With respect to capital expenditures and operating expenses, Dito Telecommunity expects to spend approximately PHP257 billion in five years.
The Philippines government has also facilitated the entry of Dito Telecommunity with two key initiatives.
One key initiative is that the government has thus far entered into agreements with 23 tower companies to help them secure regulatory approvals (e.g. cell-site permits) to supply towers planned to be shared among telecommunications services operators. This will help Dito Telecommunity with its roll-out plans.
Globe Telecom confirmed that the tower sharing initiative among telecommunications companies is gaining momentum at the 1H2019 results briefing on August 5, 2019:
We've always shared the government's goal of improving accessibility and experience in the country and have been very vocal about our support for the DICT's (Department of Information and Communications Technology) common tower initiative. To that end, we have recently entered into an MOU with ISOC Infrastructure Inc. and Malaysia-based edotco Group to fast track the building and deployment of cellular towers, the first Philippine operator to do so. ISOC and edotco will build an initial 150 sites in the provinces of Cavite, Laguna, Batangas, Rizal, and Quezon. In addition, we recently signed another MOU with Aboitiz InfraCapital and Frontier Tower Associates Philippines to roll out power to the region of Cebu, Davao, and Olongapo.
The other key initiative is the Mobile Number Portability Act that took effect from July 2, 2019, which will reduce customer switching costs, as mobile subscribers have the option of retaining their existing phone numbers from one telecommunications service provider to another.
Globe Telecom also addressed questions regarding Dito Telecommunity's roll-out plans at the 1H2019 results briefing on August 5, 2019:
On the third operator, I mean we hear probably mostly what you hear in the press. Of course, there's talk of them starting to do some site surveys and so on and discussions on data centers or sites to locate their equipment. But other than that, it's been actually very quiet. The most news we've heard was the time they were awarded a license, the frequencies. And the bond was put up by foreign banks from China. And that's really -- that's all that we've heard. I'm sure there's activities going on in the background.
With Globe Telecom's valuations being depressed in the past two years due to uncertainty involving a third telecommunications company, I believe that the increased clarity and confirmation of Dito Telecommunity's plans should remove the share price overhang regarding this matter and gradually lead to a positive re-rating of the company's valuations.
Furthermore, Dito Telecommunity faces key challenges in penetrating the Philippines telecommunications market in the next couple of years.
First, it is not easy for Dito Telecommunity to deliver on its minimum broadband speed of 27 Mbps in its first year of operation, considering that the current average broadband speed in the country is approximately 9.4 Mbps. To meet such network quality standards without existing network infrastructure and fiber assets, Dito Telecommunity is expected to be reliant on collaborations with tower companies on shared tower initiatives and possibly roaming arrangements of the two incumbent carriers initially.
Assuming Dito Telecommunity does not manage to achieve its minimum broadband speed and network quality targets due to possibly a slower-than-expected pace of new tower roll-outs, the company might find it difficult to compel consumers to switch away from the incumbent operators.
Secondly, the high capital intensity and high operating leverage characteristics of telecommunications industry tend to favor incumbents and disadvantage new entrants. In the worst-case scenario that Dito Telecommunity does not have a significant gap in network quality over its peers, it will likely have to compete aggressively on price to build up its revenue and subscriber base to cover fixed costs.
Thirdly, Dito Telecommunity will continue to be dependent on regulatory support from the Philippines government to execute on its roll-out and commercial launch plans. Elections will be held in 2022 to elect a new president in the Philippines, as the Philippines operates on a single-term limit. There is no guarantee that a new president will continue to be supportive of Dito Telecommunity, which plans for commercial launch in 2Q2020 with five-year targets in terms of network and service coverage requirements.
More importantly, incumbents such as Globe Telecom have put up preemptive moves to fend off competition from Dito Telecommunity, which is the subject of the next section.
Preemptive Actions To Fend Off New Competitor
Globe Telecom spent approximately PHP19 billion on capital expenditures in 1H2019, of which three-quarters of PHP14 billion was spent on improving the quality of the network to support data-related requirements. For the full-year FY2019, the company has guided for PHP63 billion in capital expenditures, which is double that of PHP32.1 billion and PHP36.7 billion spent in FY2015 and FY2016 respectively. Similarly, PLDT is increasing capital expenditure spending from PHP47 billion in 2018 to PHP78 billion in 2019.
Furthermore, the new tower sharing initiative elaborated on in the preceding section benefits Globe Telecom as well, and not just the new entrant, Dito Telecommunity. Globe Telecom elaborated on how the tower sharing initiative is positive for the company at the 1H2019 results briefing in August 2019:
So since the tower regulation has not been firmed up, for us, partnering with the tower companies, specifically the 2 entities or the 2 JVs that we've signed in the past few months, means that we now have new vendor partners who will build towers for us in areas where we need more towers. The difference between our current vendor partners and these 2 JVs who are aiming to get licenses with the DICT to be accredited tower companies is that they will use their own money to build the CapEx -- to build the towers. And we will merely lease from them versus current model with our accredited partners, wherein we also shell out the CapEx to build the towers. Now it also gives us variety by partnering with more of these tower companies. Again as I mentioned, first, it expands the number of entities who will build towers for the likes of ourselves in the country. And secondly, they also have different models. So take, for example, AEV or the Aboitiz tower -- Aboitiz company, they are -- they have poles which we can actually utilize in the areas where they are already present. So that actually gives us a different model on a rental basis and in areas where they are strongly complementing our current vendor pool.
Globe Telecom also further emphasized that the tower sharing initiative is fair and does not disadvantage incumbents like Globe Telecom at the expense of new entrant Dito Telecommunity:
Maybe for us, the tower sites, I think we've mentioned in the past, the more people building the better. But we also do not think that there is any other way to build these towers. Obviously, it goes through the process of site acquisition, which involves commercial negotiation, then you have to go through the permitting process. Again, as I've said in the past, nothing has changed. It can still be up to 28 permits per site. Why should they be any different from us when they apply for permits and then go ahead and build the tower, right? So nothing has changed in the law, nothing has changed in the rules, nothing has changed on the ground as far as the critical activities that go on to build a tower. Not simply because you're a different entity other than PLDT or Globe that the process will be different for you. So what it is, is more hands and more feet on the ground, trying to locate sites, trying to look for -- and trying to apply for permits. So again, the more people, the better for us to do these activities.
In other words, the tower sharing agreements that Globe Telecom signed with the tower companies recently, will help the company enhance its network quality and coverage and prepare for upcoming competition from Dito Telecommunity.
Also, Globe Telecom has been successful in engaging its subscribers to increase data usage, rather than relying on new subscriber additions in the highly penetrated Philippines mobile market (penetration rate of 136% as of end-March 2019).
These initiatives to increase mobile data usage and revenue include a partnership with short-form mobile videos app TikTok to offer its subscribers exclusive data promotions; the "Globe No Bill Shock Guarantee" automatically bundled with its mobile internet plans called GoSurf which puts a cap on bills even if monthly data allocations are exceeded; and the purchase of mobile apps charged via either their postpaid bills or deducting from their prepaid cards without the need for credit cards among others.
Mobile data revenue grew 45% YoY in 1H2019 to PHP34.0 billion to account for 62% of total mobile service revenue versus 48% in 1H2018. Monthly mobile data monthly ATPU (Average Traffic Per User) increased from 2.1GB in 2Q2018 to 3.8GB in 2Q2019.
Globe Telecom Is The Preferred Choice Of The Two Incumbents
Between the two incumbent telecommunications services operators, my preference is for Globe Telecom due to two key factors.
Firstly, Globe Telecom has a mobile revenue share of approximately 56% as of end-March 2019 (PLDT has yet to report 2Q2019 results at the time of writing), a market leadership position it has held over PLDT since 1Q2017.
Globe Telecom also has a higher number of postpaid mobile subscribers at 2.63 million as of 2Q2019 arguably higher quality and stickier than prepaid subscribers, than PLDT with 2.36 million postpaid mobile subscribers as of 1Q2019.
Secondly, Globe Telecom has greater room for growth in the enterprise/fixed network segment. The company derived 77% and 23% of its 1H2019 revenue from the mobile/wireless communications services and wireline communications services (fixed line and home broadband) segments respectively. In comparison, PLDT generated approximately half of its top line from wireless communications services and the other half from wireline communications services.
On the surface, it seems that PLDT's revenue mix is more diversified, which would help the company weather more intense competition in the mobile segment.
But Globe Telecom is growing fast outside of the mobile segment. Revenue for the company's wireline communications services (fixed line and home broadband) segment increased 16% YoY from PHP15.7 billion in 1H2018 to PHP18.2 billion in 1H2019. The number of home broadband subscribers grew 21% YoY to 1.8 million subscribers as of end-June 2019. Its corporate data business, comprising leased line services, wholesale and corporate internet access, data center services and other connectivity solutions catering to enterprises, saw revenue grow 15% YoY to PHP6.3 billion in 1H2019.
The broadband market in Philippines holds significant growth potential. Unlike the sky-high mobile penetration rate of 136% in the country, broadband penetration in the Philippines is forecasted to grow to 6.4% with 7.83 million broadband subscribers by 2028 from 6.73 million in 2018, based on research by Fitch Solutions.
In other words, Globe Telecom is expected to have a faster growth trajectory than PLDT going forward.
This is validated by market consensus which is expecting a higher forward two-year (FY2019-FY2020) revenue CAGR of 4.9% for Globe, versus a forward two-year revenue CAGR of 4.2% for PLDT.
Globe Telecom trades at 5.2 times consensus forward FY2020 EV/EBITDA based on its share price of PHP1,960 as of August 7, 2019.
It offers a 4.6% dividend yield based on a quarterly dividend payout of PHP22.75 per share.
I arrive at a target price of PHP2,560 for Globe Telecom based on a 6 times FY2020 EV/EBITDA multiple and including the potential sales proceeds (guided to be at least PHP27 billion) from the divestment of its tower assets via a spin-off, which implies a 30% upside.
The key risk factors for Globe Telecom include Dito Telecommunity performing better than expected post-commercial launch in 2020, intensified price competition and higher-than-expected capital expenditure spending.
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