PLDT Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

PLDT Inc. is a leading telecommunications and digital services provider in the Philippines, offering a broad range of services including wireless, fixed-line, data, and other services to consumers and enterprises.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

PLDT provides a diverse range of services, which can be broadly segmented as: Wireless: Mobile services remain a crucial component of PLDT’s revenue, offering both prepaid and postpaid plans through its Smart and TNT brands. As of December 31, 2022, mobile service revenues accounted for approximately 49% of total service revenues. This segment is under intense competition, with players like Globe Telecom vying for market share. The recent trend here includes the increasing prevalence of data usage and the adoption of 5G technology, requiring large investments in infrastructure to sustain growth. Home Broadband: This segment focuses on fixed-line broadband services including fiber internet, DSL and other wireline services. In 2022, this represented approximately 35.9% of the total service revenues. This segment is experiencing significant expansion, driven by an increased demand for faster internet and connectivity solutions. Fiber-optic infrastructure investment plays a crucial role here, as many customers are migrating away from legacy offerings. Enterprise Business: This segment caters to businesses, including large enterprises and government entities. This includes managed IT services, data center offerings and cloud solutions. This segment accounted for approximately 23.2% of service revenue. This segment is important for stable revenues. It is also more complex and needs to be customized more specifically to every single customer needs. It represents a growing area for PLDT, with growing cloud adoption and digital transformation among businesses.

The Philippine telecommunications market is highly competitive and subject to constant regulatory scrutiny. It is often described as an oligopoly. PLDT competes against major players such as Globe Telecom, and new smaller players that emerge from time to time.

Moat Analysis: 3/5

PLDT possesses a narrow economic moat characterized by a mix of elements that, while offering some protection, are vulnerable to changes in technology and customer preferences. Here’s a breakdown:

  1. Network Effects (Moderate): PLDT’s extensive telecommunications network creates a barrier to entry for smaller players. This is particularly evident in its fixed-line and mobile broadband services. However, network effects are not as strong as one would see in other sectors. Competitors can still compete by building their own networks or partnering with other players. While PLDT has a large market share, competitors like Globe have made significant investments in their infrastructure. There is also the option for other players to buy infrastructure from other companies, without investing much capital themselves, as evident in some PLDT’s financials.
  2. Switching Costs (Moderate): PLDT benefits from moderate switching costs, especially in its enterprise segment and among customers on long-term contracts for broadband or mobile plans. Switching costs are derived from various factors: direct costs related to re-training and learning new systems, the need to change processes, and the loss of convenience that comes from staying with established providers. The transition costs is not very high, however. It mostly includes an extra hour of your time to setup new services. Therefore, it makes switching easier as long as a competitor provide significantly higher benefit at the same price.
  3. Scale Advantages (Moderate): As a major player in the Philippines telecom industry, PLDT enjoys some cost advantages due to its large scale of operation. It includes things such as better relationships with major vendors, access to more competitive funding, and the fact that they already have the infrastructure in place. However, these advantages are not enough to make any company non-competitive and it’s not that hard to copy their approach. Also, companies with strong brand names can command premium prices without needing economies of scale and also by providing high quality or customized services at a higher price.
  4. Intangible Assets (Weak): PLDT owns valuable intangible assets such as brands and licenses but these advantages are limited by high competition and the regulatory nature of telecom industry. While PLDT has strong brand recognition, this is not always a guarantee for higher pricing power and lower retention rates because customers will still evaluate all providers equally before making their decision. Moreover, licenses are usually available from the government and do not prevent competitors from entering.
  5. Eroding Moats: PLDT’s moat is vulnerable to rapid changes in technology, changing customer behavior, and regulatory changes. Competitors are also increasingly looking to compete on pricing. Also, as seen from the company’s performance the last few years, it has not been able to establish any clear competitive advantage over its main competitor.

In conclusion, while PLDT has some moat elements, they are not strong and sustainable enough to provide a wide moat. It’s more likely a narrow moat, deserving a 3 out of 5 moat rating.

Risks to the Moat and Business Resilience

PLDT faces significant risks that could harm its moat and overall business: Intense Competition: The Philippine telecommunications market is highly competitive. In the Philippines, Globe Telecom is also a very big player and both companies are frequently battling each other for customers. Smaller competitors are also coming out with unique products or lower prices and grabbing more and more market share from the established big players like PLDT. Rapid Technological Changes: The telecommunications industry is undergoing a rapid transformation. The transition to 5G, fiber optic networks, cloud based infrastructure, and other new technologies requires significant investments. If PLDT fails to keep up with these changes, it could lose its competitive advantage. Regulatory Risks: Being a regulated company in the Philippines entails many risks. Government regulations may affect things like pricing, operations, service obligations, licenses and how the infrastructure is built. Changes in regulations could affect company revenue and put its sustainability at risk. Also, some regulatory authorities might have different opinions than what management has already planned for. Economic Downturn: The Philippines has shown resilience, but still not immune to economic downturns. Factors like inflation, high interest rate or slower economic growth could have a significant impact on PLDT and its consumers. This might cause the company to have difficulties attracting new customers or sustaining revenue from old customers. Cyber Security: There is growing concerns of cyber threats with increased digitalization. PLDT should take the necessary steps to improve its cyber security infrastructure and protect its customers data. Cyber incidents may cause damage to reputation, legal liability, and loss of customer trust, all of which might result in major losses to company value.

Business Resilience: Despite these risks, PLDT demonstrates considerable resilience. It’s large size, established brand and widespread coverage allows it to cushion some blows. The diversity in revenue streams allows it to partially offset any impact in a single area. Having strong long-term customer contracts also provides some stability to revenue flow. However, since the financial performance of the business has not been outstanding in the past years, the overall resilience of the business is still limited.

Financial Analysis

  1. Revenues:
    • PLDT’s total revenues have shown a moderate growth in the past few years. For example in 2022 they are up 3% compared to 2021 and up 5.8% compared to 2020. This growth has been mainly driven by the performance in the data service sector.
    • Revenue mix includes mobile, fixed-line, broadband, and enterprise services. There are large differences across each segment in profitability and growth. It is important to take note of these differences to properly analyze the business.
  2. Profitability:
    • The company’s profitability has been inconsistent in the last few years. While gross profits and operating income has risen steadily through out all the years, net profit has had a higher level of fluctuation. This is mostly due to high volatility in items like “Financing costs” or “Other income (expense) – Net”. Some of these items are related to currency exchange rate volatility and gains from sale of properties etc, and are not a good indication for future profitability of the business.
    • PLDT’s operating margins are moderately high, typically around 15%-20%. It’s a sign of solid business performance but not so high that creates sustainable competitive advantage.
  3. Cash Flow:
    • Operating cash flow was around 87 billion PHP in 2022, 95 billion in 2021, and 89 billion in 2020, indicating that core business operations are able to provide consistent positive cash flow.
    • Cash flows from investing include large sums spent on expansion of operations and other capital intensive projects.
    • Cash flows from financing has been highly volatile, with a wide range of values across the last few years, suggesting an active strategy to manage financing sources.
  4. Capital Structure and Debt:
    • PLDT carries a substantial level of debt. With a 2022 debt level of ₱255.7 billion, and an equity of ₱283.9 billion, their overall financial structure indicates a relatively high level of leverage.
    • The interest coverage ratio of the company, defined as EBITDA/interest expense, is around 4.7, showing that despite their debt load, they can handle interest payments. However, their ability to absorb volatility of debt repayment obligations is very low.
  5. Returns:
    • The company has historically been able to make above-average returns on invested capital (ROIC), with a median ROIC of 12% in the last 5 years. However, due to high amount of debt, the company also struggles to consistently produce high returns on equity, with 10% being the average ROE in the last 5 years.

In conclusion, PLDT has faced difficulties translating its scale and dominance into strong, stable profits. While its core operations are good, the financial results suggest high levels of volatility and lack of long-term sustainability. It’s also important to note that the company’s high levels of leverage make it a risky bet from a business perspective.

Understandability Rating: 3 / 5

The telecommunications sector is relatively easy to understand, and PLDT’s core business functions are transparent. It’s also an established industry that most of us use every day. However, understanding the full nuances of its operations, regulatory frameworks, and the effect of emerging trends requires a moderately deep understanding of the industry and the company’s financials. 1 being easiest and 5 being the most complicated.

Balance Sheet Health Rating: 3 / 5

PLDT’s balance sheet shows some vulnerabilities, with a relatively high amount of debt compared to its equity. On one hand it suggests they are aggressively pursuing growth opportunities by borrowing. On the other hand they are at risk in the future, because of their large debt load. High debt also increase their expenses, due to interest rates. While liquidity is sufficient, the level of debt makes it risky during economic downturn or market turmoil. There are also some long-term liabilities to be worried about, such as post retirement benefits, which add a lot of uncertainity to the business model. 1 being very unhealthy and 5 being very healthy.

Recent Concerns and Management’s Response

In the most recent earnings calls, management has commented on issues like high inflation, which is expected to hit the operating costs of the company. Also, with increasing competition in the market, they have also recognized the importance of increasing competitiveness, especially in the mobile sector. They have also said that they are planning on increasing capital expenditure in network infrastructure to support future growth. To counter these, they have suggested the focus on cost-cutting measures to improve profit margins, focus on customer satisfaction and loyalty, and improve network efficiency. In conclusion, the management is aware of these challenges, and are taking the necessary actions to resolve them. It’s not yet clear if the management can successfully navigate this period, but management’s response is reassuring.