PLDT Stock: A Mix Of Positives And Negatives (NYSE:PHI)

Elevator Pitch

I rate PLDT Inc.’s (NYSE:PHI) [TEL:PM] stock as a Hold.

I previously wrote about PLDT’s initial sale of towers and the company’s full-year guidance in a prior May 2, 2022 update for the company. I focus on PHI’s recent corporate developments in the current write-up.

I retain my Hold rating for PLDT, as I see a mix of positives and negatives for the stock. On the positive side of things, PLDT plans to divest more towers in the following year, which I view as a value-accretive move. On the flip side, losses from PLDT’s digital banking business and the intense competition in the mobile business are key negatives.

Selling More Towers Is Part Of The Company’s Plans

I discussed about PLDT’s “plans to sell half (5,907) of its telecommunications towers” in my earlier May 2, 2022 write-up for PHI. In that article, I highlighted that the tower sale was “positive for the company in the form of higher earnings, lower debt and special dividends.”

PLDT announced an interim dividend per share of PHP75 for the first half of 2022, which comprised of an ordinary dividend of PHP47 per share and a special dividend of PHP28 per share. PHI’s 1H 2022 special dividend was funded by the divestment of the company’s towers as highlighted above.

Looking forward, there is a high probability that PLDT will sell more of its towers. The company’s management was interviewed by The Philippine Star, a local media publication in the Philippines, in late-October. In that interview, they revealed that PLDT “plans to sign sale and leaseback agreements again in 2023 for the transfer of as many as 3,000 assets to tower operators.”

I have a positive view of PHI’s intention to execute on additional tower sales next year, as this should translate into an increase in profit and a reduction in financial leverage for PLDT.

Searching For A New Competitive Edge In The Wireless Business

The Philippine Star reported on October 31, 2022 that its “wireless arm Smart Communications Inc.” is studying the use of low earth orbit satellites to provide connectivity to their subscribers.”

Internet access remains an issue in the relatively more remote areas in the Philippines. A Philippine News Agency article published on July 24, 2022 cited comments from a representative of The Congress of the Philippines noting that “the current density of cell towers and/or signal relay stations in the rural areas makes it hard for micro, small and medium enterprises to access the internet.”

As such, PLDT and its mobile business, Smart Communications, have the opportunity to gain a competitive edge over their rivals, if they can expand the reach of their wireless network utilizing satellites. Based on my analysis, PLDT’s revenue for its Individual Mobile segment contracted QoQ for five straight quarters running between the first quarter of 2021 and the first quarter of 2021, prior to achieving positive growth for Q2 2022. Apart from pandemic restrictions and the challenging economic environment in the country, stiff competition was a key factor that led to the decline in PHI’s wireless revenue for a prolonged period of time.

At its Q2 2022 earnings call in early August, PLDT mentioned that “our competition is really expanding the coverage and also trying to improve their network”, and it acknowledged that this is “something that we also have to consider moving forward.” But PLDT also cautioned at the recent results briefing that the success and viability of satellite services “depends on the commerciality of offer in the market and how the market can absorb the cost of the service.”

In a nutshell, PHI’s move to explore the use of satellites is all about finding a new competitive edge for its mobile business and fending off competition. However, there is no guarantee that this will be successful, as the relatively high cost of such services might affect the take-up rate.

Short-Term Pain, Long-Term Gain For Digital Banking Business

A discussion of PLDT won’t be complete without touching on the company’s digital banking business, Maya Bank.

According to an October 11, 2022 news report by BusinessWorld, Maya Bank “gained one million customers and recorded PHP10 billion in deposits just five months after its launch.” Maya Bank also referred to itself as “the country’s leading digital bank app” in its media release that was cited in the recent news article.

In the long run, PLDT could realize the value of its digital banking business arm by either spinning Maya Bank off as a separate listed entity or selling it to another company.

But Maya Bank is expected to be a drag on PLDT’s bottom line in the near term. Specifically, Maya Bank suffered from losses amounting to -PHP1.6 billion in the first half of this year. It is reasonable to assume that Maya Bank won’t achieve profitability anytime soon, just like other fast growing FinTech companies in their early stage of development.

Closing Thoughts

I have a mixed view of PLDT which justifies my Hold rating for the stock. I am positive on PHI’s tower sale plans and the long-term growth potential of its digital banking business, Maya Bank. On the other hand, I am worried about wider losses for Maya Bank in the short term, and the competition posed by rivals in the wireless segment.