VITRO Sta Rosa Investment And 5G Initiatives Will Reinforce Future ICT Leadership

Key Takeaways

• Strategic investments in 5G and AI-driven initiatives are expected to boost future revenues and reinforce PLDT's leadership in ICT.
  
• Asset monetization and CapEx reduction strategies aim to strengthen the balance sheet, enhance cash flow, and improve profitability.
  
• Intense competition, legacy service decline, and macroeconomic factors threaten PLDT's profitability, while strategic cost reductions may hinder essential technology upgrades and growth initiatives.

Catalysts

Provides telecommunications and digital services in the Philippines.

• PLDT is leveraging on the adoption and expansion of 5G technology and AI-driven marketing strategies to optimize revenue generation and increase ARPU, aimed at boosting future revenue.
  
• The company's strategic investment in VITRO Sta. Rosa, the country's first AI-ready data center, is positioning PLDT to capture new enterprise opportunities and reinforce its leadership in ICT, expected to positively impact enterprise revenues in the future.
  
• The planned significant reduction in CapEx for 2025, while maintaining network improvements, is set to enhance free cash flows, improve capital efficiency, and potentially increase net margins.
  
• PLDT's continued asset monetization strategy, including the sale of additional tower sites and legacy infrastructure like copper cables, aims to strengthen the balance sheet and lower net debt-to-EBITDA, enhancing operational flexibility and future earnings potential.
  
• Maya's fintech momentum, with a rapid increase in customer base, profitability milestones, and innovative product expansions, is anticipated to contribute significantly to PLDT's earnings and revenue diversification.

PLDT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PLDT's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.9% today to 15.6% in 3 years time.
• Analysts expect earnings to reach ₱37.3 billion (and earnings per share of ₱195.27) by about March 2028, up from ₱32.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 10.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.57%, as per the Simply Wall St company report.

PLDT Future Earnings Per Share Growth

Risks

• The consistent decline in legacy revenues could continue to be a drag on overall revenue growth, as the company transitions to more modern offerings. This disruption may impact total revenues in the short term until the customer migration to data-driven services is fully realized.
  
• Intense price competition in the broadband and mobile data market may erode profit margins and limit revenue growth, as PLDT is forced to offer competitive rates to maintain market share, thus impacting the company's net margins and profitability.
  
• The potential delays and complexities related to migrating customers from legacy networks like copper to newer technologies such as fiber could slow growth initiatives and increase operational costs, potentially affecting net margins and overall earnings.
  
• The strategic reduction of CapEx, while financially prudent, might impact long-term growth by limiting the pace and scope of necessary network improvements, particularly in areas like 5G expansion, which is crucial for revenue generation and maintaining market leadership.
  
• Exposure to macroeconomic factors, including currency fluctuations and interest rate volatility, particularly since 14% of their debt is dollar-denominated, could impact financial stability, leading to potential increases in interest expenses and affecting net margins.

Valuation

• The analysts have a consensus price target of ₱1760.167 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 ₱1450.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱238.7 billion, earnings will come to ₱37.3 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 11.6%.
• Given the current share price of ₱1345.0, the analyst price target of ₱1760.17 is 23.6% 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.