Free cash flow a challenge to Telcos in next two years

MANILA, Philippines – Telco players PLDT Inc. and Globe Telecom Inc. would find it challenging to generate positive free cash flow (FCF) in the next two years, as profitability declines and as they set higher capital expenditures to support the rollout of LTE (Long Term Evolution) network amid increasing data usage, Fitch Ratings said.

In a report, Fitch said it sees continued FCF deficit for telco players until next year.

Fitch forecasts the EBITDA (earnings before interest, taxes, depreciation and amortization) margin of the Philippine telecoms industry to narrow to 37 to 38 percent from 40 to 41 percent given competitive pressure and the ongoing structural shift to lower-margin data services.

“Notably, PLDT is more vulnerable to margin dilution as it incurs higher marketing cost and handset subsidies in a bid to regain lost market share,” Fitch said.

In addition, PLDT relies more on legacy services as it derived 53 percent of its revenues in the first semester of the year from voice and messaging services compared with Globe’s 42 percent.

In terms of capital expenditures, Fitch expects the Philippine telcos to spend more as they expand their LTE network and fiber infrastructure.

In particular, capex could rise to around P93 billion to P96 billion next year from P75 billion last year.

Last May, the two telcos purchased the telco assets of San Miguel Corp.

Following the acquisition, the two telcos have gained access to frequencies including the 700 megahertz band which could provide better indoor coverage.

Under the respective three-year rollout plans submitted by telcos to the National Telecommunications Commission to comply with the conditions in approving the co-use agreement for the spectrum resources they acquired from San Miguel, both have committed to utilize the frequencies and accelerate LTE rollout to cover 90 to 95 percent of the country’s cities and municipalities by 2018.

As for revenues, Fitch said it expects Globe to have stronger data monetization and market share gains given its higher average revenue per user post-paid subscribers.

“Our forecasts assume that its revenue growth will decline to the mid-single-digits in 2017 to 2018 (2015: 16.2 percent), but outpacing that of PLDT’s low-single-digit level,” Fitch said.

Last year, Globe achieved record-high service revenues of P113.7 billion, up 15 percent from P99 billion in 2014.

Consolidated service revenues of PLDT, meanwhile, slid slightly to P162.9 billion in 2015 from the P164.9 billion in 2014.