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Tuesday, April 29, 2014

Telecom Sector Outlook: Earnings grow in line with expectations

Broadband pushes earnings higher. The telecommunication industry’s aggregate 2013 earnings reached Php50.3Bil, up by 6.7% from the previous year and in line with both COL and consensus estimates. Growth was primarily driven by the improving competitive environment and strong broadband revenues. For the full year, aggregate service revenues reached Php254.5Bil, up by 5% from the previous year. The broadband segment continued to be a strong performer with aggregate revenues increasing by 16.6% to Php41.7Bil. In addition, broadband revenues now account for 16.4% of service revenues, an improvement from 14.8% in the previous year. We believe that broadband, especially mobile internet revenues, will continue to be a source of growth for the telco industry as smartphone penetration remains slim at less than 20%.

Subsidy expenses put pressure on margins. Globe and PLDT’s push for increasing postpaid subscriber base led to higher postpaid revenues. In 2013, aggregate postpaid subscribers reached 4.4Mil, up by 9% from the previous year. However, this came at a cost of paying higher subsidy expenses. Subsidy expenses rose by 36% to Php12.8Bil. As a result, combined EBITDA margin of GLO and PLDT declined to 44.8% from 45.5%. PLDT believes that the size of creditworthy postpaid market is just around 6Mil subscribers. On the other hand, GLO continues to be bullish on postpaid and expects to double its subscriber base in the next four to five years.

Globe gains market share as PLDT cleans up subscriber base. Total wireless subscribers of GLO and PLDT grew by 5% to 109Mil. The improvement was driven mostly by the increase in GLO’s subscriber base as PLDT redefined its subscriber base to exclude some units without real purchased load. As a result, GLO has now 35% of market share, a stark improvement from just 32% last year.

Reiterate BUY rating on TEL, and maintain HOLD on GLO. We reiterate our BUY rating on TEL with a fair value of Php3,260/sh. We continue to like PLDT for the defensive nature of its business and cost savings to be generated from the Digitel integration and modernization program. In addition, we believe that broadband will spur revenue growth for the industry. Valuations also remain attractive, with capital appreciation potential still substantial at 15%, and dividend yield at 6.6%

- COL Financial

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