PLDT (TEL) – Deep in the Woods

It was reported by on March 9, 2018 that telco giant PLDT  (TEL) sounded off hope hat its business struggles were coming to a close this 2018. believes that it won’t be so.  Its balance sheet would show that as of the end of 2017 it is still loaded with debt.  PLDT’s total debt stood at 348 Billion pesos while its capital stood at 111 Billion giving it a total debt to equity ratio of 3.14.  PLDT is heavily leveraged.  In 2011, PLDT was just leveraged to a ratio of 1.61 total debt to total equity.

Meanwhile, its cash flows from operations is dwindling.  For the year 2017 it generated cash flows from operations of 58.6 Billion, 27% lower compared to the cash it generated from operations in 2012 when PLDT generated 80.4 Billion.  PLDT’s slowing cash flow generation ability has been due to the fact that it has not respond well to the needs of the time.  This is very evident in the erosion of its revenue. From 170.8 Billion for the year 2014 its revenue for the year 2017 was just 160 Billion down 6% from the 2014 level. is changing how we use and think about money. Click here to enroll!

PLDT did not re-invest enough its earnings during the good years to attune its capabilities with the time, instead PLDT distributed it mostly to its stockholders.  It was made a milking cow by its controlling stockholder, the First Pacific Co. Ltd..  In its full-year 2017 results presentation, PLDT boasted that over the last 13 years it has distributed dividends totaling 400.6 Billion or an average of 30.8 Billion per year to its stockholders.

PLDT has put itself deep in the woods – huge debt load, dwindling revenue and cash flows from operations, and huge capital expenditure requirements to update its capability with the demands of time.  PLDT has no where to go to funds its capital expenditure (capex) requirements.  It is already debt laden, its capability to add more debt to fund its capex is now constrained.  To go deep on its balance sheet its remaining material investments is now Rocket Internet with a carrying value of 12.8 Billion Pesos and MediaQuest PDRs with a carrying value of 10.8 Billion as of end of 2017.  The two assets are the only material investments left available for sale to fund capex requirements. reported this earlier. believes that eventually PLDT will have to lower its dividend payout.  As of end of 2017 at a price of 1,480, PLDT’s (TEL) dividend yield stands at 5.1%.  It is of our opinion that to sustain such dividend yield, the market has to price PLDT (TEL) lower at around 990 or maybe higher at 1,000.  At that price we recommend to include it in your portfolio.


TEL – A Culture of Under-Investment in Telco Capabilities

TEL (PLDT) has for quite sometime has hovered at around 1,450 – 1,500 level. This is despite frequent press releases by the company of good news about it. It is imminent that TEL will still have to go down.

The woes at TEL can be traced back to its culture. When First Pacific took over TEL from Antonio “Tonyboy” Cojuangco, Manuel V. Pangilinan (MVP), the present TEL CEO, was criticising TEL’s previous management group as like the “government.” It was said that the first order of business of the previous management was the capital expenditure/capex rather than advertising and creating a brand. It was like a government because in the government it is usually capital projects that is being sought first by the politicians. There is a culture of entitlements among politicians in government.

MVP then change its culture and increased its advertising budget then relegated the capex to a lesser priority. At that time there was an explosion in the usage of mobile data then limited to SMS and ringtones and mobile calls. It was a bonanza for TEL. MVP then stepped-up the dividend pay-out ratio of TEL. From 2007 t0 2013 pay-out ratio was 100% of “core earnings,” before slowing it down to 90% in 2014.

First Pacific at the time of its TEL take-over was also reeling the effects of the “Asian Currency Crisis.” First Pacific executives in Hong Kong tried to sell its TEL stake to the Gokongwei Group behind the back of MVP. MVP fought back and vowed that TEL will be the saviour of First Pacific.

True to his words, MVP made TEL profitable, thanks to the SMS addicted Filipinos, and repatriated most of the profits of TEL to First Pacific. The cash flows from the dividend pay-out of TEL reinvigorated the then diminished First Pacific. MVP was made the CEO of First Pacific. At that time, it was boasted that marketing savviness was the key to the profitability and that it had killed the “government-like” culture of capital expenditure first in TEL. This will come to haunt back MVP and TEL.

The killing of the “government-like” culture of capital expenditure firsts in TEL led to under-investments in the capabilities of TEL. The under-investments allowed TEL to pay-out most of its earnings to its stockholders, the largest of which is the First Pacific Company. Technological innovations and disruptions fueled the demand for more data capability out of telcos. Because TEL under-invested in its capabilities it was not able to satisfy it customers. No matter how savvy its advertising and branding is, customers can’t just be appeased by TEL’s lack of capability to satisfy customer demands.

At the outset of LTE, TEL failed to immediately expand its capability to LTE. Instead it bought a telco, Digitel, with also less capabilities. It bought Digitel only to pare down the number of towers it owns because many became redundant. The Gokongweis sold out Digitel because it was capital intensive and that it may not have the resources to compete and transition it to a more digital telco.

Because most of the profits TEL had earned during the good years was paid-out as dividend, it has now to dig deep on its resources to fund its transformation. It is now reaching on its MERALCO stake to fund its capex.

Most of TEL’s investments have already been sold out to fund its capex to date. As of end of 3Q 2017, the only significant investments left are MediaQuest PDRs with a carrying value of 13.16 Billion and Rocket Internet with a carrying value of 12.74 Billion. MediaQuest spans newspapers (Business Word, Philippine Star), radio broadcasting, TV Broadcasting (ABC 5), and pay-TV (Cignal). TEL has planned to spend 50 Billion for capex in 2018. TEL may need more than that amount in the future as demand for data has been increasing year to year as people, homes, and enterprises adopts internet of things. TEL may have to sell also MediaQuest and Rocket Internet stakes to fund further its capex in the coming years. This is why we recommend that you sell.

Proceeds from asset divestments may not enough to fund further its capital expenditures to make its capabilities at par with the best in the world (a capability which the government and its customer demands from them). So TEL may have to reduce further its dividend pay-out. Its dividend pay-out stands at 60% from 100% in 2013 and 90% in 2014. As dividend from TEL get smaller, market might react to maintain the dividend yield of TEL which is currently at 6.41%. This means, market will have to price TEL also lower. So if you are holding it now, it it is time to cut your losses and sell.