Fitch Ratings has affirmed both PLDT’s and Globe Telecom’s outlook as stable but expects their high gross margins to fall slowly over the next three years as lower-margin data services replace traditional higher-margin services at the Philippine operators.
The rating agency said Globe’s revenue next year is likely to rise by mid-single digits, which is above PLDT’s, thanks to its higher proportion of smartphone users.
The agency forecasts larger player PLDT will continue to lose market share (about 1 percentage point annually) to Globe, which increased its mobile revenue market share to 43 per cent from 34 per cent last year.
PLDT’s mobile unit, Smart, has a 60 per cent market share while Globe, with 44.5 million connections, has a 39 per cent share, according to GSMA Intelligence data.
Fitch expects PLDT’s operating EBITDA margin to be 47 per cent next year (last year it was 48 per cent), which it says is higher than most regional peers thanks to the duopoly market structure and relatively benign competition and regulatory risks in the industry.
Globe’s operating EBITDA margin was 44.3 per cent last year.
But Fitch expects both companies’ margins to decline gradually by 50-150 basis points a year until 2017 as lower-margin data services replace higher-margin voice, text and long-distance services.
Both company’s free cash flow will continue to be negative due to high capex and dividend commitments, Fitch said.
Globe’s expansion of its 3G/4G networks will keep its capex as a percentage of revenue high at 29-30 per cent. Last year it was 30.5 per cent.
Fitch said Globe is investing more aggressively than PLDT even though its revenue is only 60 per cent of the market leader’s. Globe’s capex last year was PHP29 billion compared to PLDT’s PHP28.7 billion.
PLDT’s ratio of capex to revenue is likely to rise from 17 per cent last year to about 20 per cent in 2015, or PHP34-35 billion, as it expands 3G coverage to 100 per cent of the population and 4G coverage to 50 per cent. The leader also is expanding its fibre network to 90,000km.
Fitch expects PLDT’s leverage to rise due to its $445 million investment in Rocket Internet, which is unlikely to contribute to its earnings over the next three years.
PLDT is expected to pay about 100 per cent of its net income in dividends. However, management says that PLDT could lower its dividends after boosting capex and its debt-funded Rocket investment. Fitch believes Globe will continue to pay 85-86 per cent of its net income in dividends.
PLDT’s rating remains at ‘BBB’ while Globe’s stays at ‘BBB-‘