Fitch gives stable outlook to PLDT

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Fitch has affirmed the Philippine Long Distance Telephone Co.’s (PLDT) Long-Term Foreign-Currency (LTFC) issuer Default Rating (IDR) and senior unsecured rating at “BBB.”

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The telecommunication firm’s Long-Term Local-Currency (LT LC) IDR and National Long-Term Rating were also affirmed at “A-” and “AAA[phl],” respectively. The outlook is stable.

PLDT is the largest telecom operator in the Philippines with more than 65-percent market share in the wireless, fixed-line and broadband segments at end-June 2013.

The ratings also demonstrate the company’s strong financial profile, including high earnings before interest, taxes, depreciation and amortization (Ebitda) margins, which is 45 percent in 2012, and sound funds flow from operations or FFO-adjusted net leverage as of end-2012 by 1.5 times.

Fitch also forecast that PLDT’s LT FC IDR continues to be constrained by the Philippines’ Country Ceiling of “BBB,” reflecting the country’s foreign-currency transfer and convertibility risk.

PLDT’s LT LC IDR exceeds the sovereign’s LT LC IDR by two notches because foreign-currency transfer and convertibility risk are not taken into account, and this reflects the company’s unconstrained credit profile.
Fitch expects to see a gradual margin decline. This is due to continued intense competition for subscribers and a structural shift from high-margin traditional services (long-distance voice and short messaging service, or SMS) to low-margin data services.

Strong data growth
Fitch also said that PLDT’s operations in the Philippines are aggressive in acquiring wireless subscribers, including offering tariff plans with unlimited calls, SMS and data usage, and offering subsidies rather than differentiated services. While the contribution from long-distance calls will fall, overall fixed-line revenue will increase due to strong data growth.

Fitch expects PLDT’s capital expenditures to fall to about P30 billion in 2013 after peaking at P36 billion in 2012, with the completion of a major network modernization investment undertaken from 2011 to 2012.

Free cash flow generation will remain marginal due to a continued high-dividend payment. The ratings agency forecasts financial leverage will remain at about 1.4 times in 2013.

PLDT has approval from its board of directors to invest a total of P9.6 billion to acquire a 64-percent economic interest in the pay-TV business owned by MediaQuest, which operates under the brand name of Cignal TV. As at the end of June 2013, Cignal had around 515,000 subscribers.

Fitch agency said that investment is in line with PLDT’s intent to broaden its distribution platforms, and increase the company’s ability to deliver multimedia content to its customers across the company’s broadband and mobile networks.

The investment is funded by proceeds from the disposal of noncore assets (like the sale of its business process outsourcing segment), which means there will be no impact on the company’s leverage.

Rosalie C. Periabras

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