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Moody's: PLDT's rising capex and weak performance in 2Q 2015 are credit negative

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Moody's Investors Service says that Philippine Long Distance Telephone Company's (PLDT) increasing capex and continued weak operating performance in 2Q 2015 are credit negative. Moody's is cautious on the company's medium term outlook, as leverage will remain in the upper end of tolerance for its Baa2 issuer and senior unsecured ratings.

"Although PLDT is progressively re-pivoting its digital initiatives, growth in data and broadband failed to offset continued weakness in its voice and texting segments. In addition, the decline in PLDT's toll revenues, which accounted for 13% of consolidated service revenues, will continue to weigh heavily on revenue growth for a few more years," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

PLDT's reported consolidated service revenue was down 2% year-over-year to PHP40.6 billion. Declines in toll revenues (international long distance [ILD] and national long distance [NLD]) pressured revenue growth, as increasing internet data usage has caused adverse substitution of voice and texting usage. Excluding ILD and NLD revenues, consolidated service revenue was up 1% year-over-year.

Revenue from the wireless segment declined 5% year-on-year to PHP27.3 billion, and accounted for 67% of PLDT's consolidated service revenue in 2Q 2015. Within this segment, data/broadband and digital revenues rose 12% year-on-year. That was not enough, however, to offset declines in cellular voice (-10%) and short message service (SMS) (-5%), both of which were hurt by the availability of over-the-top options.

Revenue from the fixed-line segment increased by 5% year-on-year to PHP13.3 billion, and accounted for 33% of PLDT's consolidated service revenue in 2Q 2015. Data and broadband (including fixed broadband, corporate data and data centers) again drove growth, up 12% year-on-year.

PLDT's reported consolidated EBITDA for 2Q 2015 declined 13% year-on-year, although excluding the PHP1.4 billion in Manpower Rightsizing Program (MRP) costs booked in this quarter, the decline would have narrowed to 5%. The company's reported consolidated EBITDA margin fell 1.6 points to 43.4% in 2Q 2015, excluding MRP costs.

"We expect PLDT's EBITDA margin to remain under pressure over the next 12-18 months as domestic competition will remain intense and high-margin toll revenues decline. In addition, the company will need to continue its network and service investments, notably in digital businesses," adds Tsuen, also the lead analyst for PLDT.

PLDT has increased capital expenditure estimates by PHP4 billion to PHP43 billion for 2015, compared with the PHP35 billion in 2014. It now also expects that capex will remain elevated in 2016, as the company is carrying out investments to improve its network quality. Moody's expects this capex to be funded from internally generated cashflows and debt.

PLDT's adjusted leverage rose to 2.0x in June 2015 from 1.8x in December 2014. This increase was driven by capex and soft operating performance, both of which Moody's expects will continue for the rest of the year.

PLDT's liquidity position remains strong. As of June 2015, the company had debt maturing in the next 12 months of about PHP17 billion, which it can cover with its cash and cash equivalents of PHP37 billion. Refinancing is likely, given the company's excellent access to the local bank and bond markets.

Upward rating pressure could emerge if PLDT: (1) maintains adjusted consolidated EBITDA margins of over 45%; (2) lowers its adjusted consolidated debt/EBITDA to below 1.5x on a sustained basis; and (3) ensures that shareholder returns and asset investment policies do not substantially weaken its financial profile.

PLDT's rating will come under downward pressure if its adjusted EBITDA margin falls below 40% or adjusted debt/EBITDA exceeds 2.0x as a result of continued weak operating performance or event risk. Any additional material investment in non-core businesses could also be negative for the ratings.

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Tags: pldt  Philippines