PLDT: Risk-Reward Is Balanced (NYSE:PHI)

Elevator Pitch

I continue to have a Hold investment rating assigned to PLDT Inc. (NYSE:PHI) [TEL:PM] stock.

With my prior February 24, 2023 update for PHI, I explained that the pullback in PLDT’s share price between late-2022 and early-2023 was warranted on the basis of disclosures relating to “larger than expected capital spending which exceeded the company’s budget.”

I turned out to be right, as PLDT’s shares continued to underperform on both an absolute and relative basis in the last few months. As per Seeking Alpha price data, PHI’s stock price declined by -8.0% (or a milder -3.7% adjusted for dividends received) following the publication of my earlier late-February write-up; the S&P 500 rose by +4.2% in the same time frame.

My current article focuses on the analysis of PLDT’s most recent quarterly financial performance and the company’s full-year fiscal 2023 outlook. In my view, PLDT’s high single digit forward P/E ratio and mid-single-digit forward EV/EBITDA multiple are fair, considering its top line growth deceleration in the recent quarter and the difficulty of forecasting its financial performance for 2023.

PHI has a balanced risk-reward profile which translates into a Hold rating for the stock. There are risk factors relating to PLDT’s results for the current fiscal year, but there are also potential rewards relating to valuation multiple expansion in the case of positive surprises.

PLDT Registered Slower Top Line Growth In The Recent Quarter

PHI reported the company’s financial results for the first quarter of the current year last week on May 4, 2023.

Revenue for PLDT expanded by +5.1% YoY from PHP49.8 billion in Q1 2022 to PHP52.4 billion for the recent quarter. This is the third consecutive quarter where PHI has registered a slowdown in top line expansion on a YoY basis. As a reference, PHI’s sales grew by +7.4%, +6.8%, and +5.9% for Q2 2022, Q3 2022, Q4 2022, respectively.

PLDT’s revenue growth has continued to decelerate in Q1 2023 for two key reasons.

The first reason is that inflationary pressures have led to weak demand for PHI’s telecommunications services. The inflation rates in the Philippines were as high as 8.6%, 8.7%, and 7.8% for January, February, and March 2023, respectively. For its mobile business, PLDT’s mass-market brand TNT typically targets low-income consumers in the Philippines, and TNT’s subscriber base contracted by -2% QoQ at the end of March. As such, it isn’t a surprise that PHI’s mobile business (referred to as the Individual business segment in its disclosures) was the only segment of the company that witnessed a YoY revenue contraction in Q1 2023. Separately, the number of fixed wireless broadband subscribers for PLDT also decreased by -7% QoQ in Q1 2023.

The second reason is that new subscription growth for PLDT was negatively affected by the introduction of mandatory SIM card registration. Local media The Philippine Star highlighted in a recent April 26, 2023 news article that consumers in the Philippines have to “register their SIM cards (by July this year) as provided for in a recently enacted law designed to eliminate fraud and scams.” PHI acknowledged at the company’s Q1 2023 earnings call on May 4, 2023 that it suffered from “a significant reduction in new (subscriber account) activation because of (the new) SIM registration (requirement)” in the recent quarter.

PHI Declined To Offer Full-Year Earnings Guidance

At its first quarter earnings briefing, PHI didn’t provide specific numbers when an attendee asked about “an updated guidance for full year 2023 Telco Core Income.” In response, PLDT admitted that “it’s a tough question” and will only outline its target of delivering higher core earnings as compared to fiscal 2022.

In my opinion, there are two major factors that could have made it difficult for PHI to give a clear indication of what the company expects its actual bottom line growth to be.

One factor is approximately one-third of PHI’s subscriber base, which is equivalent to under 20% of its top line, has yet to complete the mandatory SIM card subscription process as of early May. Assuming a worst case scenario where PLDT isn’t able to get most of its remaining subscribers to register their SIM cards by the late July deadline (as earlier mentioned), PHI might possibly record a lower subscriber count and slower revenue growth in the second half of this year.

The other factor is the risk that PLDT’s actual operating expenses for the current fiscal year turn out to be much higher than expected. The Philippines’ central bank, otherwise known as The Bangko Sentral ng Pilipinas or BSP, sees the inflation rate for the country going up to as high as 6.0% for the full year. High inflation hurts both PHI’s new subscriber growth prospects and the company’s operating costs. PLDT revealed at its Q1 2023 results call in early May that the company’s “expenses” such as utility costs across the board “are still very high.”

Closing Thoughts

The market currently values PLDT Inc. at a consensus forward next twelve months’ normalized P/E multiple of 8.5 times and a consensus forward next twelve months’ EV/EBITDA ratio of 5.0 times, as per S&P Capital IQ’s valuation data. PLDT’s undemanding valuations are reflective of the downside risks relating to the company’s future revenue and earnings.

On the flip side, PLDT Inc. shares offer significant rewards for investors willingly to “bet” on the company reporting above expectations results in 2023, which could bring about a positive re-rating of its valuations. In a nutshell, the risk-reward for PHI stock is fair, and this supports my decision to stay with a Hold rating for PLDT Inc.