STT Data Center Expansion, GCash Scaling, And 5G Boom To Supercharge Revenue And Boost Net Margins

Key Takeaways

• Data center expansions and strategic leadership changes are set to boost revenue and improve margins through sustainable IT capacity and customer-centric approaches.
  
• Reduced CapEx and expansion of GCash and 5G services aim to enhance free cash flow, earnings sustainability, and capitalize on demand for digital solutions.
  
• Shifts towards data services, regulatory risks, operational vulnerabilities, infrastructure underinvestment, and uncertain GCash IPO timeline may impact Globe Telecom's revenue and strategic planning.

Catalysts

Provides telecommunications services to individual customers, small and medium-sized businesses, and corporate and enterprise clients in the Philippines.

• Globe Telecom's data center expansions, with STT Fairview set to be service-ready in Q2 2025 and STT Cavite 2 by late 2025, are poised to significantly enhance its revenue from increased IT capacity and demand for sustainable data centers.
  
• The strategic appointment of Carl Raymond Cruz as Deputy CEO, with his vast experience, is expected to drive continued growth and improve net margins through a focus on customer-centric and data-driven approaches.
  
• Globe's reduction in CapEx spending, targeting below $1 billion in 2025, is likely to improve free cash flow and, in turn, contribute to better earnings sustainability.
  
• The scaling of Mynt, particularly GCash, which saw an increase in net income before taxes from 6% to 14%, suggests continued growth in revenue and contributions to Globe's bottom line through digital financial solutions and increased user engagement.
  
• The robust growth of mobile data usage and the expansion of 5G services are anticipated to drive further revenue growth and improve margins as Globe capitalizes on increased demand for high-speed connectivity.

Globe Telecom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Globe Telecom's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.4% today to 12.9% in 3 years time.
• Analysts expect earnings to reach ₱26.1 billion (and earnings per share of ₱176.32) by about December 2027, up from ₱24.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₱33.0 billion in earnings, and the most bearish expecting ₱22.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2027 earnings, up from 12.0x today. This future PE is greater than the current PE for the PH Wireless Telecom industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.45%, as per the Simply Wall St company report.

Globe Telecom Future Earnings Per Share Growth

Risks

• The decline in mobile voice and SMS revenues demonstrates a shift towards data-related services, which, if not well-managed, could result in lower ARPU (average revenue per user) and potentially impact future revenues.
  
• The ongoing review of the ECPay deconsolidation by the Philippine Competition Commission may pose legal or regulatory risks, potentially affecting revenue reporting and financial transparency.
  
• The impacts of natural disasters, such as the multiple typhoons experienced, which disrupted mobility and traffic, highlight operational vulnerabilities that can adversely affect service delivery and subsequently revenue.
  
• The reported investment in network expansion has decreased, which could result in underinvestment in infrastructure, challenging the company's ability to maintain network quality and potentially impacting long-term earnings.
  
• The lack of an immediate clear timeline for GCash's IPO suggests uncertainty in capital raising opportunities and market conditions, potentially impacting future earnings and strategic financial planning.

Valuation

• The analysts have a consensus price target of ₱2523.0 for Globe Telecom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱2900.0, and the most bearish reporting a price target of just ₱2030.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₱202.8 billion, earnings will come to ₱26.1 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 10.5%.
• Given the current share price of ₱2030.0, the analyst's price target of ₱2523.0 is 19.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.