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FRI 16 NOV 2018

Third telco player risk outweighs


positive earnings results

3Q18 recurring profits up

The telecom sector’s recurring core net income during 3Q18 increased by 20.4% y/y to Php11.0Bil, GLOBE TELECOM INC.
HOLD
largely driven by GLO which delivered a 51.4% increase in 3Q18 profits to Php4.9Bil. Although
PHP1,820
TEL’s 3Q18 profits only grew by 3.4% y/y, its performance was also above expectations.
PLDT, INC.
Exhibit 1: Recurring core earnings summary HOLD
PHP1,450
% of forecasts
in PhpMil 3Q17 3Q18 % Change 9M17 9M18 % Change
COL Consensus
GLO 3,233 4,895 51.4 11,207 14,766 31.8 85.4 84.5
TEL 5,900 6,100 3.4 18,100 19,100 5.5 80.0 -
TOTAL 9,133 10,995 20.4 29,307 33,866 15.6 - -

source: GLO, TEL, Bloomberg, COL estimates

As mentioned earlier, GLO’s 3Q18 recurring core net income increased by 51.4% y/y to
Php4.9BilBil. This brought 9M18 profits to Php14.76Bil, above expectations, as it accounted for
85.4% and 84.5% of COL and consensus forecasts, respectively. Results exceeded expectations
due to strong revenue growth and lower than expected selling, general and administrative
(SG&A) expenses, subsidy expenses, and interconnection costs.

Likewise, TEL’s recurring profits grew by 3.4% y/y to Php6.1Bil. This brought 9M18 core profits
to Php19.1Bil, ahead of COL (80.0%) full year estimates. TEL’s outperformance was due to the
stronger than expected increase in revenues as the growth of data revenues more than offset the
continuous decline of non-data revenues.

Exhibit 2: Total Service Revenues Summary


% of forecasts
in PhpMil 3Q17 3Q18 % Change 9M17 9M18 % Change
COL Consensus
GLO 32,239 35,085 8.83 95,139 103,346 8.63 78.5 77.0
TEL 37,646 39,488 4.89 113,029 117,741 4.17 75.7 -
TOTAL 69,885 74,573 6.71 208,168 221,087 6.21 - -

source: GLO, TEL, Bloomberg, COL estimates

ADRIAN ALEXANDER YU
RESEARCH ANALYST
adrian.yu@colfinancial.com

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
T ELECO M SE C TO R I T H I R D T E LCO PL AYE R R I SK O U T W E I G H S P O SI T I V E E A R NINGS R ES ULTS

FRI 16 NOV 2018

Service revenues: Robust growth sustained by strong data


revenues

During 3Q18, total service revenues of the telco sector grew by 6.7% to Php74.6Bil. This brought
9M18 service revenues to Php221.1Bil. During 3Q18, GLO’s total service revenues managed to
grow by 8.8% while TEL’s service revenues grew by 4.9%.

GLO’s 9M18 revenue grew by 8.8%, driven by the robust performance of data revenues,
which increased by 21.2% y/y. This more than offset the 5.7% drop in non-data revenue. On a
consolidated basis, data revenues now account for 59.4% of total service revenues compared
to only 53.2% during 9M17.

Meanwhile, TEL’s 9M18 service revenues were up 4.2% to Php117.7Bil as the 29% growth in
data revenues more than offset the 20.1% drop in non-data revenues. Data and broadband
revenues now account for 72% of TEL’s fixed line and 49% of the wireless business segment
revenues, up from 58.7% and 33.6% respectively during the same period last year. Data
revenue growth was evident in all segments with mobile data revenues growing by 52% y/y
to Php29.2Bil, fixed home broadband growing by 55% y/y to Php20.2Bil, and corporate data
revenues growing by 14% y/y to Php16Bil.

Flattish mobile subscriber count and ARPU despite aggressive


promotion

GLO’s subscriber count in 3Q18 reached 65.4Mil, up 10.2% y/y. However, on a q/q basis, GLO’s
mobile subscriber count was up by only 0.3% Moreover, blended ARPU fell to Php135 in 3Q18
from Php138 in the previous quarter. The drop in ARPU was largely responsible for flattish
mobile revenues on a q/q basis, despite the slight increase in subscribers.

Similarly, TEL’s mobile subscriber count also came in flat on a q/q and y/y basis at 58.0Mil
subscribers. Blended mobile ARPU was also flat q/q at Php122. Nevertheless, management
remains optimistic as the average number of daily Youtube users increase from 800,000 in
April to 5 million in October. Wireless data usage also increased by 32% q/q. As such, TEL is
going into Phase 3 of its Free Youtube promo plan, which involves the gradual monetization of
the video habit. TEL will be relaunching the GigaSurf packs, with the least expensive package
now costing Php50 for three days in an attempt to upsell subscribers towards higher value
packages. Moreover, to stimulate more demand and potentially increase its subscriber base,
TEL widened its range of partners to include Cignal, NBA TV, iFlix, and iWantTv among others.

GLO has not yet disclosed how it will respond to TEL’s move to extend the data promotion,
while limiting it to higher value products.

COL Financial Group, Inc. 2


T ELECO M S E C TO R I T H I R D T E LCO P L AYE R R I S K O U T W E I G H S P O SI T I V E E A R NINGS R ES ULTS

FRI 16 NOV 2018

Exhibit 3: GLO Mobile Subscriber Count

% Change
3Q17 4Q17 1Q18 2Q18 3Q18
y/y q/q
Subscribers (Mil)
Globe Postpaid 2.47 2.48 2.47 2.49 2.52 1.80 1.2
Globe Prepaid 27.7 27.9 28.9 29.8 30.5 9.92 2.2
TM 29.2 30.3 31.9 32.8 32.4 11.10 -1.4
Total Subscriber Count (Mil) 59.3 60.7 63.3 65.1 65.4 10.16 0.3

source: GLO

Exhibit 4: TEL Mobile Subscriber Count


% Change
3Q17 4Q17 1Q18 2Q18 3Q18
y/y q/q
Subscribers (Mil)
Smart Prepaid 20.54 20.43 20.20 20.26 19.53 -4.92 -3.6
Smart Postpaid 1.37 1.39 1.40 1.43 1.43 4.23 0.4
TNT 28.36 28.81 29.23 29.75 30.13 6.22 1.3
Sun Prepaid 6.75 6.54 6.24 6.07 5.97 -11.51 -1.5
Sun Postpaid 1.19 1.13 1.05 1.00 0.98 -18.31 -2.9
Total Subscriber Count (Mil) 58.2 58.3 58.1 58.5 58.0 -0.32 -0.8
source: TEL

GLO adjusting dividend payout guidance for 2019

During GLO’s 3Q18 analyst’s briefing, management disclosed that the Board of Directors
approved the proposed change in the dividend policy from 75-90% of prior year’s core net
income to 60-75% of prior year’s core net income. The amended policy was designed to
increase GLO’s flexibility with respect to capital management in order to ensure that the
company could continue to spend sustainably given its high capex requirement.

Note that during 9M18, GLO invested Php32.5Bil in capex to support the growing subscriber
base and increasing demand for data. Moving forward, we expect GLO’s capex level to remain
elevated at around Php50Bil per annum for the next three to five years.

Reducing estimates on third telco player risk

On November 8, the consortium comprised of Dennis Uy’s Udenna Corporation (ISM), Chelsea
Logistics Company (CLC), local telco operator Mislatel, and China Telecom was declared the
provisional winner of the third telco license. In its bid documents, the consortium made very
aggressive commitments including a capex plan of Php257Bil and a coverage of 84% of the
population over five years. The consortium also has the financial muscle to execute its plan.
Note that China Telecom generated Php146Bil in profits in 2017. The third telco will also most
likely engage in a price war with the incumbents to grab market share as its deep pockets will
allow it to operate at a loss for a long period of time.

COL Financial Group, Inc. 3


T ELECO M SE C TO R I T H I R D T E LCO PL AYE R R I SK O U T W E I G H S P O SI T I V E E A R NINGS R ES ULTS

FRI 16 NOV 2018

Given the growing risk of intensifying competition, we tempered our forecasts for both GLO
and TEL by cutting our subscriber and ARPU assumptions. The initial impact of the third telco
is expected to be muted though as it will still have to roll out the necessary infrastructure
before it can provide services. Nevertheless, the risk on earnings is on the downside. As such,
sentiment for GLO and TEL will most likely be poor in the short-term until the numbers prove
that the third telco is not a threat to GLO and TEL.

Exhibit 5: Summary of forecast changes for GLO


2019E 2020E
in Php Mil % Change % Change
Old New Old New
Service revenues 145,251 144,254 -0.7 153,017 150,642 -1.6
EBITDA 65,827 65,343 -0.7 69,363 68,211 -1.7
EBITDA margin (%) 45.3 - 45.3 -
EBIT 33,834 33,372 -1.4 35,894 34,834 -3.0
EBIT margin (%) 23.1 - 23.1 -
Net income 18,725 18,401 -1.7 19,823 19,077 -3.8
Net margin (%) 12.8 - 12.7 -
source: COL estimates

Exhibit 6: Summary of forecast changes for TEL


2019E 2020E
in Php Mil % Change % Change
Old New Old New
Service revenues 163,643 162,979 -0.4 171,969 170,640 -0.8
EBITDA 75,005 74,700 -0.4 79,440 78,827 -0.8
EBITDA margin (%) 45.8 45.8 46.2 46.2
EBIT 33,433 33,131 -0.9 35,390 34,793 -1.7
EBIT margin (%) 20.4 20.3 20.6 20.4
Core income 24,906 24,661 -1.0 26,284 25,798 -1.8
Core Income Margin 15.2 15.1 15.3 15.1
source: COL estimates

COL Financial Group, Inc. 4


T ELECO M S E C TO R I T H I R D T E LCO P L AYE R R I S K O U T W E I G H S P O SI T I V E E A R NINGS R ES ULTS

FRI 16 NOV 2018

IMPORTANT RATING DEFINITIONS


BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA


VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA


DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS


SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU


RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.


2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
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WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 5