Telcos may hike capex ahead of new player’s entry

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Philippine telecommunications firms will likely increase their capital expenditures ahead of a new player’s possible entry, Fitch Ratings said, but competition is not expected to ramp up significantly in the short term.

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The ratings for Philippine Long Distance Telephone Company (PLDT) and Globe Telecom, Inc. will not be affected, the debt watcher said in a report on Thursday, given their “high rating headroom.”

Fitch rates PLDT and Globe as BBB and BBB-, respectively, with stable outlooks.

Both firms’ free cash flow (FCF) deficits are expected to continue as they invest in greater 3G/4G capacities and broadband infrastructure, Fitch said, and a changing revenue mix and cheaper data plans could narrow earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs margins further.

In another report issued day earlier, Fitch said the possible entry of a new carrier—a joint venture between San Miguel Corp. and Telstra Corp.—would have limited impact on competition over the next two years.

“Infrastructure sharing is not mandatory in the Philippines and Fitch expects the newcomer to face difficulties providing regional mobile coverage in the absence of domestic roaming arrangements,” the debt watcher noted.

“Initial rollout by the new entrant is likely to focus on mobile broadband services in the first two years, with a likely expansion into mobile telephony once the network build-out is completed,” it added.

“However, the joint venture will experience large cash burn given the significant capital outlay and price competition to build a subscriber base.”

Fitch said industry capex could increase to around P85 billion in 2016 from P55 billion to P58 billion in 2012 to 2014, with the immediate challenge for telcos being that of luring customers to higher data plans and data monetization.

It said that of the two incumbent telcos, Globe has the larger exposure to the mobile sector, which accounts for 76 percent of revenue, compared to PLDT’s 63 percent.

A new player could lead to a race to introduce faster 4G LTE services and this could have an impact on industry profitability over the longer term, Fitch said.

“We believe this could present strong value propositions for faster 4G LTE services and the impact on industry profitability would be greater over the longer term,” it said.

“The industry outlook could turn negative if severe competition in the data segment were to result in a sharper-than-expected fall in FCF. We feel this is unlikely, however,” the debt watcher added.

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  1. GLOBE and SMART are free riding consumers with low bandwidth and expensive data transfer costs. Instead of infrastructure sharing (joint cell site sharing) via interconnectivity fees (mandatory by law in the US for ALL service providers ) and increasing the available bandwidth / reducing cell site saturation both companies worry about profit losses. If the Telstra build-out is up and on line in 2 years SMART and GLOBE will be scratching their heads wondering what happened. Telstra will initially offer lower prices and more daily / monthly data transfers for much less to lure customers from both GLOBE and SMART. I will be one of the first people in the Telstra new customer line!