PLDT: Spotlight On Tower Sale And Management Guidance

Summary

• PLDT's recent tower sale was done at premium valuations, and this should be positive for the company in the form of higher earnings, lower debt and special dividends.
• The company is targeting a high-single digit percentage EBITDA growth for 2022, which I think is achievable thanks to the strength of its home broadband business.
• PLDT is a Hold; I am positive on PLDT's tower divestment deal and the company's favorable management guidance, but these are already factored into its price performance and valuations.
• Looking for more investing ideas like this one? Get them exclusively at Asia Value & Moat Stocks. Learn More »

Satoshi-K/E+ via Getty Images

Elevator Pitch

I upgrade my investment rating for PLDT Inc.'s (NYSE:PHI) [TEL:PM] shares from a Sell to a Hold. I touched on competition and associated downside risks for the company in my earlier article for PLDT published on July 9, 2021. In this article, I provide an update of my views for PLDT considering the company's recent tower sale and its management guidance for fiscal 2022.

PLDT expects to deliver a decent high-single digit growth in the company's EBITDA this year. This should be largely driven by the robust growth in the home broadband business which is a beneficiary of the migration of subscribers from copper broadband to fiber broadband. Separately, PLDT recently revealed its plans to sell half of its telecommunications towers, which will contribute to an estimated PHP9 billion of special dividends and a +10% increase in pro-forma earnings. These positive developments prompted me to raise my rating for PLDT to a Hold. However PLDT is not a Buy, as the stock has had a good run in the past one year and its current valuations are unappealing.

Tower Sale

On April 19, 2022, PLDT disclosed that it had entered into a transaction to sell "5,907 telecom towers and related passive telecom infrastructure for PHP 77 billion." This is a very substantial deal, as the total number of towers sold represented "approximately half" of the company's telecommunications infrastructure portfolio, according to PLDT's investor presentation issued on the same day.

I have a positive view of PLDT's recent transaction for three key reasons.

Firstly, the tower sale is earnings accretive. PLDT estimated that its FY 2021 net profit would have been +10% higher assuming that the company sold its towers on the first day of the prior year. This is based on a projection of +PHP4 billion of incremental earnings on a pre-tax basis (or +PHP3 billion on a post-tax basis).

The PHP4 billion accretion estimate comprises of PHP1.4 billion in operating cost savings and a PHP2.6 billion reduction in interest expenses. By selling the towers and leasing them back, PLDT is expected to record relatively lower rental expenses as compared with depreciation costs incurred in the past owning these towers. On the other hand, PLDT plans to save on interest costs by paying down its debt with the sales proceeds derived from the tower divestment.

Secondly, PLDT is allocating capital in an optimal manner that is aligned with shareholders' interest. Aside from deleveraging (as highlighted above) and capital expenditures, the remainder of the divestment proceeds linked to the tower sales will be largely set aside for special dividends.

Specifically, PLDT has guided for special dividends of as much as PHP9 billion. Based on PLDT's market capitalization of approximately PHP403 billion as of April 29, 2022, this will boost PLDT's forward dividend yield by +2.2 percentage points. According to consensus financial projections sourced from S&P Capital IQ, PLDT boasts a forward FY 2022 dividend yield (excluding special dividends) of 5.5%. In other words, PLDT's forward FY 2022 adjusted dividend yield (including special dividends) could be as high as 7.7%.

Thirdly, PLDT struck a great deal, as the towers were sold at a reasonably high valuation and future lease terms for the towers are decent.

PLDT's tower sale transaction was done at an EV/EBITDA multiple of around 20 times and a P/B ratio of roughly 3.3 times. Separately, the tower leaseback agreement is 10 years long with a renewal option; and the operation & maintenance fees charged to PLDT for these towers can only rise by a maximum of +3% every year.

In a nutshell, the tower sale by PLDT is value-accretive for the company.

2022 Management Guidance

PLDT issued the company's management guidance for fiscal 2022 when it reported its full-year fiscal 2021 earnings in March. The company expects to generate an EBITDA in excess of PHP100 billion in FY 2022, and deliver an EBITDA growth rate in the high-single digit percentage range as compared to its FY 2021 EBITDA of PHP96.2 billion. This is aligned with the sell-side consensus financial forecasts (source: S&P Capital IQ) pointing to a FY 2022 EBITDA of PHP102 billion for PLDT implying a +6.2% increase.

I am confident that PLDT will able to meet management guidance and market expectations this year thanks to its home broadband business.

According to its Q4 2021 results presentation slides, revenue and subscribers for PLDT's home broadband business grew by +24% and +27% to PHP47.8 billion and around 3 million, respectively in fiscal 2021. Specifically, PLDT's fiber sub-segment of its home broadband business saw a +82% growth in revenue to PHP33 billion in 2021, and the number of fiber broadband subscribers increased by +87% to 2.42 million last year. The fiber broadband sub-segment has been growing rapidly, as a result of the ongoing migration of broadband subscribers from copper to fiber.

The positive growth momentum of PLDT's home broadband business, and its fiber broadband segment in particular, should allow the company to deliver a high-single digit growth in its EBITDA this year as per guidance.

As PLDT will only be expected to complete the sale of 5,907 towers by the end of 2022 (towers will be divested in phases in May, Q3 2022 and Q4 2022), the positive earnings impact of the tower sale is likely to be fully reflected in fiscal 2023.

Share Price Performance And Valuations

PLDT's shares have done well in the past one year, and this is also evidenced by the stock's valuation multiples.

PLDT's Historical One-Year Stock Price Performance

Seeking Alpha

PLDT's shares are up by +34% in the last one year, while the S&P 500 has been flattish over this period. As per S&P Capital IQ's valuation data, PLDT's current 6.4 times consensus forward next twelve months' EBITDA is higher than its three-year and five-year average forward EV/EBITDA multiples of 5.6 times and 5.9 times, respectively.

In other words, the positives linked to PLDT's tower divestiture and bullish 2022 guidance are already priced into the stock's current valuations in my opinion.

Bottom Line

I like PLDT for the robust growth of its home broadband business and its recently announced tower sale transaction. But PLDT's shares have already outperformed significantly on both an absolute and relative (versus S&P 500) basis in the past year, and PLDT's current valuations are not sufficiently attractive to justify a Buy investment rating. As such, I have only raised PLDT's investment rating from a Sell to a Hold (rather than a Buy).

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.