PLDT sees 200% profit jump

Telecom giant Philippine Long Distance Telephone Co. (PLDT) is expected to end the year with a consolidated net income of P9.97 billion, or a growth of more than 200 percent compared to last year’s P3.12 billion.

Leading investment analyst Citigroup Smith Barney also projects group net profit to soar to P17 billion in 2004, also mainly driven by PLDT wireless subsidiary Smart Communications. Earnings before interest, taxes, depreciation and amortization (EBITDA) for 2003 is expected to hit P54.6 billion compared to P44.89 billion last year and next year’s projected P61 billion.

Smith Barney expects PLDT’s deleveraging efforts to continue boosting the company’s organic growth prospects. The company is expected to reduce its P156.4- billion debt by 46 percent by 2006 which will translate into lower interest expenses.

At the heart of PLDT’s cash flow generation, it said, is Smart which this year paid 100 percent of its 2002 net profits as dividends to PLDT. The group’s deleveraging is supported by PLDT’s strong cash flows with Smart generating bulk of it.

The Smith Barney report expects unlevered free cash flow yield (unlevered free cash flow as a percentage to market capitalization) rising from 17 percent for 2002 to 24 percent by Dec. 2006.

Dividends from PLDT are possible by the first quarter of 2005, according to management, although certain loan covenants may be a barrier to any potential to surprise earlier, the report noted. "In our estimates, we are assuming PLDT will resume paying dividends by 2006 and factor in a payout ratio of 40 percent," it said.

Meanwhile, the report noted that valuations look very reasonable, with PLDT stock trading at a P/E of 9.8x. This, compares well to the local market’s 12.4x and PLDT’s own historical 14 to 16x band.

The investment analyst group targets a share price for PLDT of P950 based on discounted cash flow (DCF) fair value estimate of P957 per share (weighted average cost of capital of 14.3 percent for PLDT fixed line and 13.3 percent for Smart).

The DCF-based fair value analysis is made up of P42 per share for PLDT fixed line, P988 per share for Smart, negative P74 per share for the remaining Piltel letter of support and the put option held by PLDT convertible preferred shareholder (pertaining to the Piltel debt restructuring).

It rated PLDT low risk, with fundamental risks consisting of high gearing levels, regulatory risks, and the impending initial public offering of Smart (its wireless license sets a deadline of August 2004), given that the wireless subsidiary is the main earnings and value driver.

Smith Barney noted that PLDT runs the risk of being an ‘orphan’ stock as investors will likely switch to Smart.