Data Center Expansion And FinTech Ventures To Boost Revenue Growth And Enhance Net Margins

Key Takeaways

• Strategic investments in mobile data, fiber, and data centers are expected to drive revenue growth and capture enterprise market opportunities.
  
• Initiatives to monetize assets and reduce costs aim to lower leverage, diversify revenue streams, and improve financial health.
  
• Reliance on declining legacy revenue, saturated market, and high financing costs pose risks to long-term growth, net margins, and financial stability.

Catalysts

Provides telecommunications and digital services in the Philippines.

• The continued growth in mobile data and fiber-only revenues, paired with initiatives to revitalize these segments, such as subscriber acquisition, upselling, and improved customer service, suggests potential for increased revenue.
  
• PLDT's focus on expanding its data center capacity, highlighted by the opening of the Vitro Santa Rosa data center, is poised to capture growth in enterprise solutions, thereby potentially boosting revenues from corporate data and ICT services.
  
• The anticipated monetization of the data center business and ongoing tower sales are expected to reduce leverage and positively impact net margins by lowering interest expenses.
  
• PLDT's investments in Maya, a fintech venture expected to reach profitability by late 2024, could enhance earnings by diversifying PLDT’s revenue streams beyond traditional telecom operations.
  
• The company's focus on reducing CapEx while maintaining its network expansion, especially with 5G adoption, is likely to improve free cash flows and net margins, supporting a healthier balance sheet.

PLDT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PLDT's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 17.2% in 3 years time.
• Analysts expect earnings to reach ₱41.8 billion (and earnings per share of ₱188.08) by about December 2027, up from ₱26.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₱47.0 billion in earnings, and the most bearish expecting ₱28.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2027 earnings, up from 10.3x today. This future PE is lower than the current PE for the US Wireless Telecom industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.43%, as per the Simply Wall St company report.

PLDT Future Earnings Per Share Growth

Risks

• PLDT's net service revenue growth is primarily driven by mobile data and fiber services, while legacy revenues create a drag. This reliance on declining legacy revenues poses a risk to consistent long-term revenue growth and net margins.
  
• The competitive landscape in the wireless segment is heavily saturated, as noted by the 130 million phone subscriptions in a 110 million population, which could pressure subscriber retention and overall revenue.
  
• High financing costs, partly due to a 50 basis point increase in average interest rates and new loans, could affect net income and earnings by increasing financial expenses.
  
• Ongoing discussions for potential monetization of data center business and uncertainty over its sale completion timeline could create financial unpredictability and potentially impact earnings if not executed efficiently.
  
• PLDT aims to reduce CapEx intensity, but achieving this amid ongoing expansion projects and technological upgrades might strain cash flow, reduce net margins, and impact future earnings.

Valuation

• The analysts have a consensus price target of ₱1755.0 for PLDT 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 ₱2070.0, and the most bearish reporting a price target of just ₱1500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₱243.7 billion, earnings will come to ₱41.8 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 10.4%.
• Given the current share price of ₱1273.0, the analyst's price target of ₱1755.0 is 27.5% 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.