Fitch cuts PLDT rating on capex, earnings pressures


Ratings on Thursday cut Philippine Long Distance Telephone Co.’s (PLDT) long- term local currency issuer default rating (LC IDR) to ‘BBB+’ from ‘A-’, noting increased capital expenditures (capex) and earnings pressures.

The telco’s long-term foreign-currency IDR (FC IDR) and its foreign-currency senior unsecured rating, meanwhile, were kept at ‘BBB’, as was the national rating at ‘AAA’. The
outlook remains stable.

“The downgrade on the LC IDR reflects our expectation of a further deterioration in PLDT’s funds flow from operation-adjusted net leverage to 2.5x in 2015-2017 (2014: 1.9x) due to significant capex expansion,” Fitch said.

It noted that expansion plans would likely push the company’s capex/revenue ratio to 25% this year from 20% in 2014, returning to the latter level only after 2016.

It highlighted the allocation of US$100 million for digital acquisitions this year, of which US$20 million has already been invested in an Internet TV service provider and an online payment solutions company.

Operating earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR) are expected to weaken to about P77 billion this year from P80 billion in 2014.

“Furthermore, the changing revenue mix and the build-out of the digital business are likely to erode operating EBITDAR margin to 44%-45% (2014: 46.6%),” Fitch said.

“Our forecast assumes losses in the digital business over the next three years,” it added.

Free cash flow is expected to stay negative over the next two years given the large capex and despite PLDT plans to reduce special dividends.

“Our forecasts assume dividend payment of around 80%-85% of core profits; the company’s stated dividend policy is to pay out at least 75% of its core profit,” Fitch said.

With competition heating up with the planned entry of Australia’s Telstra Corp. Ltd., PLDT is still expected to remain the Philippines’ dominant telecommunications company.

“Large cash burn for the new entrant is likely in the initial period as it faces significant capital investment to build its network in the absence of infrastructure sharing,” Fitch said.

PLDT’s liquidity was described as “solid,” with its cash balance of P37.2 billion as of end-June 2015 more than enough to cover P16.7 billion in obligations due in the next 12 months. Over 60 percent of total debt, meanwhile, is due after 2017.

“In addition, we believe PLDT has strong access to local banks and the retail bond market, given its solid financial and leading market position in the Philippines,” Fitch said.


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