PLDT’s Rocket investment not to affect ratings – Moody’s

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THE Philippine Long Distance Telephone Co.’s (PLDT) P19.5-billion investment in Rocket Internet AG can be accommodated within its Baa2 ratings and stable outlook, international credit rating agency Moody’s Investors Service said.

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PLDT announced on August 7 that it had entered into a global strategic partnership with Rocket, a German Internet company, to jointly develop mobile and online payment technologies and services in the Philippines and other emerging markets.

Under the partnership agreement, PLDT will invest 333 million euros, or about P19.5 billion, for a 10-percent stake in Rocket. PLDT will also obtain the right to appoint one member of Rocket’s nine-person supervisory board.

In a statement, Moody’s vice president and analyst Yoshio Takahashi said, “PLDT plans to fund the investment from cash and new debt, and as a result we expect PLDT’s leverage to increase modestly in 2014. However, we expect the leverage increase will remain within the parameter for its Baa2 ratings.”

Moody’s expects PLDT’s adjusted debt to EBITDA ratio to increase to 1.9 times to 2.0 times by December 2014, from approximately 1.8 times for the 12 months to June 2014.
Moody’s estimates that PLDT will be able to finance bulk of the investment from its excess cash.

PLDT had P43 billion in cash and cash equivalents as of June 2014, which is approximately P10 billion above its historical level of at least P30 billion.

While the partnership with Rocket should help PLDT strengthen its mobile and online payment services, generating stable returns from investments in the fast-changing and competitive internet industry is challenging, Moody’s said.

Nevertheless, the investment is still moderate at about 5 percent and 15 percent of PLDT’s total assets and total equity, respectively, based on its balance sheet as of June 2014, the ratings agency said.

PLDT’s ratings continue to take into account its increased investment appetite, as demonstrated by this most recent investment, Moody’s said.

Moody’s expects PLDT to continue to seek investment opportunities in the internet and multimedia sectors to strengthen its ability to deliver multimedia content through its broadband and mobile networks, and to grow its e-commerce business.

However, Moody’s views that a new major investment is unlikely at least for the next six to 12 months, given PLDT’s increased leverage.

Earnings to improve in 2015
The company’s financial results for the first half of 2014 were slightly below Moody’s expectations. The Philippine telco reported that consolidated EBITDA for the first half of 2014 declined 4 percent year-on-year due to an increase in handset subsidies, cash expenses related to the operation of its expanded network, and residual post-Typhoon Yolanda restoration costs.

Given PLDT’s first-half results, Moody’s expects the company’s reported consolidated EBITDA to fall moderately in 2014.

However, Moody’s said that PLDT’s earnings should slightly improve in 2015, given that it will no longer have to deal with the aftermath of Typhoon Yolanda, and considering the company’s plan to reduce costs, as well as the continued growth in revenue from its broadband, corporate data, and mobile internet businesses.

PLDT’s dominant market positions in the fixed-line, broadband, and cellular services will continue to support its stable earnings from its core telecommunications service.

Moody’s expects cash flows from operations of P70 billion to P75 billion over the next 12 months. In Moody’s estimation, this should be sufficient to fund cash needs of approximately P105 billion, including short term debt of P14 billion, capital expenditures of approximately P30 billion and the likely maintenance of a 100-percent dividend payout ratio.

Rocket is a German internet company providing e-commerce, online marketplaces and financial technology platforms for consumers in over 100 countries. It reported aggregate revenues of over 700 million euros in 2013.

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