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PLDT (TEL) accumulating debt, future cash dividend in grave danger with duopoly gone

TEL has been gradually accumulating debt. As of June 30, 2020 (1H 2020) total long-term debt of TEL is at 199.7 Billion Pessos. That is a significant 28.2% increase from 155.8 Billion Pesos as of the end of December 31, 2018. It can be remembered that on October 2019 TEL initiated a consent solicitation from bondholders to amend certain provisions in the indentures to allow TEL to borrow more money without breaching any debt covenants.

TEL has to borrow more in 2019 because it has to fund its massive capital expenditures. In 2019, TEL spent 88 Billion Pesos for network and infrastructure. TEL has to catch-up on network and infrastructure investments as the third telco rolls out its network and telecom infrastructure.

Over the years while it grew debt, TEL did not invests aggressively on its infrastructure. Over a three period from 2016 to 2018, TEL’s investment on its infrastructure averages to only 42 Billion Pesos.

TEL was among the early companies to dip into borrowings as the COVID-19 pandemic introduced economy-crippling restrictions. In 1H2020 it borrowed a staggering 57.5 Billion Pesos pushing it long-term debt to 199.7 Billion Pesos. Most of those borrowing were spent to pay debt and cash dividend leaving an amount of 24.7 Billion to its coffer. Dividend and debt repayment for the next succeeding periods are therefore secured.

For this year TEL was planning to spend 83 Billion Pesos for capital expenditures but slashed it to 63 Billion Pesos when the pandemic struck. Then it raised it to 70 Billion Pesos after the President’s call for investments in telco infrastructures.

The 70 Billion Pesos capital expenditures for its network and infrastructure will keep up its competitiveness but could consume all its cash generation from operations which could just be at the 70 Billion Peso level. The pandemic might may warrant a shortened payment period to its suppliers and contractors thereby limiting TEL’s ability to squeeze them for cash from operations. (This could be another story.)

With cash from operations all going to network and infrastructure expansion, dividend and debt payments for the year will have to be taken from the proceeds of the borrowing.

The borrowings has secured the short-term outlook of TEL but elevated its indebtedness. The elevated debt poses a serious threat to the dividends of TEL especially in an increasingly competitive industry.

TEL management was able to skillfully manage the cycle of investments and under-investments over the years to maximize shareholder returns but that was when there was only a duopoly in the telecom industry.

With the unveiling of a third telco and the emergence of fast expanding telco players – Convergence ICT and Now Corporation (NOW), TEL can no longer afford that cycle of investments and under-investments. It has to invests and invests on its network and infrastructure to keep up its competitiveness and protect is market share and revenue.

In such circumstances cash flow from operations will have to go first to capital expenditures and any excess amount will have to be used to gradually pare down debt. This time, TEL will have to manage the cycle of borrowing and repayment, dividend and no dividend.

With growing competition, TEL can no longer afford to under-invests in its network otherwise its revenue could gradually erode as competition gradually eats it market share. With an elevated debt , a gradual erosion of revenue could pose an existential threat to TEL.

Long-term and dividend holders of TEL should be wary of those two developments – an elevated debt and a growing competitive environment.

Disclaimer: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent perspective.  Accuretti Systems Inc. does not hold any PLDT Inc. shares.

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