Philippine telecommunication companies’ capex cuts this year should temporarily ease the burden on cash flow, but regulatory pressure and looming competition are likely to drive larger investments in 2021, says Fitch Ratings. PLDT Inc. (BBB/Stable) and Globe Telecom, Inc. (BBB-/Stable) have both lowered their capex guidance for 2020 by 15%-20% from their original targets in light of pandemic-related supply disruption.
The government’s push for significant network improvements – recently reiterated by President Duterte at the annual state of nation address – is likely to accelerate network expansion over the next few quarters. The new common-tower policy is also likely to hasten tower builds and access to cell-sites, which are being held up by the lengthy regulatory approval process for permits. The new policy requires telcos to lease new towers from independent tower companies, a move to level the playing field for new entrant, Dito Telecommunity. However, the mandatory tower sharing does not apply to existing towers.
We believe a spill-over of deferred capex into 2021 will stretch domestic telcos’ leverage profiles, as operating cash flow continue to fall behind investments. Telcos’ capex rose at a rapid CAGR of 33% between 2017 and 2019, while revenue increased at a CAGR of only 7%. We forecast flat industry revenue for 2020 (2019: 7%), despite a stronger-than-expected 1H20 increase of 3%. Downside risks that could delay a revenue recovery in 2H20 include continued national lockdowns, accompanied by prolonged relief measures extended by telcos.
PLDT outperformed the industry for the third consecutive quarter in 2Q20, expanding its telco revenue share by another 0.8pp to 54%, thanks to strong execution in wireless (6% yoy growth) and fixed-line home broadband services (12% yoy growth). Heavy capex investments over the past few years and the recent reallocation of 2G spectrum to 4G have improved network quality and coverage. Meanwhile, Globe posted a 4% yoy decline in its quarterly telco revenue due to weakening mobile revenue (10% yoy decline).
We expect competition to remain stable over the next 12 months, with the commercial launch of Dito not taking place until 1H21 at the earliest. The third mobile network operator aims to cover at least 37% of the national population across 17 cities and municipalities by March 2021. However, the planned IPO of fibre broadband operator, Converged ICT Solutions, will increase competition in the fast-expanding home broadband market. We believe PLDT’s broader service diversification and entrenched fixed-line position will mitigate revenue pressure in its wireless business, compared with Globe.