• Telcos to boost 2015 capex – Fitch


    Fitch Ratings on Tuesday projected that two telecommunication giants would increase their capital expenditure (capex) in 2015 as they pursue investments in fast-growing data services and the expansion of their fiber networks.

    The rating agency noted in a special report that profitability at the Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom, Inc. (Globe) is likely to decline amid an increase in capex in 2015.

    However, the two companies’ ratings will not be affected given the available headroom, according to Fitch Ratings.

    It also expects free cash flows (FCF) for both PLDT and Globe to be negative in 2015 due to their increased capex.

    Industry capex for 2015, meanwhile, is pegged at around P60 billion from P58 billion in 2014, or 24 percent to 25 percent of revenue as both telcos invest in fast-growing data services and expand their fibre networks.

    Dividends are also seen to increase in line with larger profits as PLDT and Globe distribute around 100 percent and 85 percent of their net income, respectively.

    The ratings agency, however, cited that PLDT could review its dividend policy as leverage continues to deteriorate following its debt-funded acquisitions and large capex plans.

    It further projected that industry revenue will rise by a mid-single digit rate, driven by fast-growing data services, which will offset losses from stagnating voice and declining text and international revenues.

    The operating earnings before interest, taxes, depreciation, amortization, and rent (or restructuring) cost margins of PLDT and Globe, meanwhile, are likely to narrow by 100 basis points (bp) to 150bp in 2015 to 47 percent and 44 percent, respectively, amid unlimited tariff offerings, cheaper data plans and higher handset subsidies.

    Profitability will also deteriorate as a lower-margin data service replaces higher-margin legacy services, including voice, text and international traffic.

    Although unlikely, the industry outlook could turn negative if FCF falls significantly below the levels projected by Fitch because of greater competition in the data segment.

    Moreover, PLDT’s Local-Currency Issuer Default Rating (IDR) of ‘A-’ could be downgraded if its 2015 funds flow from operation (FFO)-adjusted net leverage rises to above 2.0x while in 2014 it has only 1.9x.

    The trend of PLDT’s investments in unprofitable internet and media companies are broadly credit negative. Its $445 investment in Rocket Internet AG in 2014 has raised leverage and Rocket is unlikely to contribute financially to PLDT’s credit profile in the next two to three years, according to Fitch.

    PLDT’s Foreign-Currency IDR could be upgraded if there is a positive rating action on the Philippines’ Country Ceiling of ‘BBB’. Globe’s Foreign-Currency IDR could be upgraded if FFO-adjusted net leverage declines to below 1.5x (2014: 2.4x) on a sustained basis, although this is unlikely in the short term.


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