PLDT says it is on the right track in developing new revenue streams

While admitting that achieving growth in the mobile sector has become more challenging, telecommunications giant Philippine Long Distance Telephone Co. (PLDT) expressed confidence yesterday that it is taking the right steps in developing new revenue streams, especially in the landline business, that could more than offset slower growth in the cellular business.

"PLDT is confident that it is taking the right steps in developing new revenue streams by building its next generation network and investing in new technologies including broadband. The company is also strongly committed to continue improving shareholder returns and is targeting to increase its common dividend payout to a minimum of 50 percent of 2006 earnings from 40 percent in 2005," according to PLDT assistant corporate secretary Florentino Mabasa.

Also yesterday, PLDT president and chief executive officer Napoleon Nazareno said that the company’s wireless subsidiary Smart Communications is expected to post real growths in subscriber numbers after the company has completed the process of weeding out subscribers which have not been topping-up and, therefore, not contributing revenues to the company.

As a result of the SIM-swap activities by mobile operators, many mobile phone subscribers were holding on to more than one SIM, each SIM being counted as one subscriber regardless of whether said subscriber has been topping-up.

Both Smart and Globe earlier terminated SIM-swap activities which has only resulted in bloating subscriber numbers.

While Nazareno would not disclose at this time by how much the 20.4 million Smart/Piltel subscriber numbers as of end-2005 has increased, he said there was an increase in January 2006. "Any increase in subscriber numbers starting in January will be a real increase because we have completely cleaned up non-revenue generating SIMs," he said.

Morgan Stanley earlier downgraded PLDT to ‘equal-weight’ after a strong rally in the company’s shares over the past two years. It said that while the firm’s fundamentals remain good, there is limited room for positive surprises in the future as the mobile phone market has matured and because there is risk that consumers may prefer voice over internet protocol (VoIP) services rather than using mobile phones.

In its research report dated Feb. 7, Morgan Stanley downgraded its stock rating on PLDT from "over-weight" to "equal-weight" with a target price of P1,830 per share.

In the same report, it said it prefers Globe Telecom to PLDT, but given the low liquidity in Globe shares, Morgan Stanley recommends telecommunications investors to shift to other issues in East Asia. An "equal-weight" call indicates that the stock’s total return is expected to be in line with the total return of the country’s MSCI index on a risk-adjusted basis over the next 12 to 18 months.

According to the research analyst firm, PLDT shares are already fairly valued at a price/earnings ratio of 9.5 times and EV/EBITDA of five times.

"We, however, believe that PLDT’s share price is still trading below its regional peers and Phisix stocks which trade at a range of 10.5x to 17.3x P/E and an average of 14.7x P/E, respectively. In addition, nine out of 12 research analysts covering PLDT continue to have a "Buy"/"Overweight" stock rating on the company with target prices ranging from P1,900 to a high of P2,200," Mabasa informed the Philippine Stock Exchange.

He also emphasized that the possible dilution that Morgan Stanley highlights, arising from conversions of the remaining outstanding Series V, VI and VII convertible preferred shares is a result of the continuing improvement in PLDT’s share price, "as we are seeing trading levels of the underlying PLDT common shares already approximate the put option price on these convertibles two to three years earlier than their mandatory conversion dates."

Mabasa pointed out that while the voluntary conversions of these preferred shares will increase the number of common shares outstanding by approximately 8.2 million shares, representing 4.5 percent of PLDT’s 180.8 million outstanding common shares as of Dec. 31, 2005, the potential earnings per share dilution is estimated to be less than 2.5 percent as the conversions will remove certain financing costs that impact on earnings.

These conversions, he said, will also take away a financial liability which is currently being carried on PLDT’s balance sheet.

PLDT is expected to post a reported net income of over P32 billion for 2005 and core earnings of over P30 billion.