It has been extremely fashionable for fund managers to trash the Philippines and its leading proxy Philippine Long Distance Telephone (PLDT). The number they have been dialling is zero for their weighting in the country and the stock. But they may just be missing out on one of the better turnaround stories in Asia. There are two big reasons for getting excited about the stock. The first is explosive growth in the take-up of mobile-phone services. The second is a clever deal to take control of GMA-7, the Philippines' No 2 free television station. 'We intend to be the dominant telecoms if not multimedia provider in the Philippines with over 6.2 million subscribers and growing,' said PLDT chief executive Manuel Pangilinan in Hong Kong last week. Keenly priced pre-paid mobile services are unlocking the potential for growth among the 79 million Filipinos, many of whom have never had fixed-line phones. The mobile-phone penetration rate was only 8 per cent at the end of last year and could reach 25 per cent in three to five years, the company believes. 'Growth in GSM [Global System for Mobile] has been robust,' said Mr Pangilinan. 'Barring unforeseen circumstances I do not see why we should not add two million, if not more than that, GSM subscribers for the year 2001.' That would be roughly doubling the numbers. The company has been adding more than 7,600 GSM subscribers each day so far this year. About 90 per cent of the new clients are on the low-end prepaid schemes and their bills are just 600 pesos (about HK$92) a month on average. But they are helping the company get towards the economies of scale it needs to really become profitable. PLDT is now going through GMA-7's books and hopes to close the 8.5 billion peso deal by September. The main stumbling block is getting congressional resolution allowing the change in controlling shareholder. PLDT has put together a consortium of other investors which will buy 66.67 per cent of GMA-7. PLDT will get voting control of the television channel but the costs will be shared among the group members. Getting its hands on quality content may be advantageous. Smart Communications, the bigger of PLDT's two mobile units, is already capable of offering general packet radio services (GPRS) which give speedy mobile access to the Internet. Sharing physical sites and infrastructure can produce cost savings, while GMA advertisers can be offered exposure to PLDT's army of subscribers. Finally, as Mr Pangilinan pointed out: 'We are one of the largest advertisers in the Philippines.' so owning GMA-7 should help cut PLDT's marketing bills. The transformation of PLDT from political and financial football to potential star-growth stock has been some time in the making. The once-stodgy fixed-line operator came under the control of Hong Kong-listed conglomerate First Pacific in 1998, along with its loss-making mobile unit Piltel. First Pacific bought a controlling 17.2 per cent stake in PLDT from a holding company owned by some of the most powerful figures in the Philippines, including the Cojuangco family, which controls brewer San Miguel. Antonio Cojuangco remains chairman though First Pacific's stake has subsequently reached 23.1 per cent, with 31.7 per cent voting interest. At the impeachment trial of Joseph Estrada it was alleged First Pacific officials bribed the then president to facilitate their takeover. Mr Pangilinan is understood to have deftly shifted with the political winds, appearing at a 'people power' rally which helped vice-president Gloria Arroyo-Macapagal to oust Mr Estrada. Politics aside, the respected Manila-based executive has been using his management skills to knock PLDT into shape as an integrated telecommunications provider. 'We have undertaken major restructuring of the fixed-line management to give them more autonomy . . . so they now have [profit and loss] and cash flow responsibilities,' he said. 'It was closely centralised at the head office until the middle of last year.' Fixed-line international rates have been slashed to compete with mobile companies, with a special deal of 40 centavos a minute anywhere any time. PLDT has also launched a fixed pre-paid service. The changes helped the fixed-line company lift revenues 6 per cent last year in an era where former monopoly firms around the globe have been under pressure from new competition. Smart, which was owned by the First Pacific group, has been brought into PLDT's control, alongside Piltel. Piltel's operations have now been outsourced to Smart, resulting in staff being cut from 1,800 to 90 and 300 million pesos in savings last year. The two mobile units cannot be merged, however, due to their differing licence commitments, shareholders and creditors. Smart has 45 per cent of the mobile market, while Piltel, which is due to complete a debt-restructuring deal next month, has 10 per cent. Their biggest competitor, Globe, Telecom has 41 per cent. Part of the mobile growth phenomenon in the Philippines has been 'texting', where subscribers send short messages to each other over their handsets. A record 107 million messages were sent on Valentine's Day this year. Data is 'one of the fastest growing businesses of PLDT', said Mr Pangilinan and made up about 5 per cent of PLDT's revenues last year. Earnings last year fell 64 per cent to 1.1 billion pesos, with heavy spending on acquiring new subscribers for Smart in the first half partly to blame. But Smart swung from a loss of 1.98 billion pesos in the first half to a profit of 1.58 billion pesos as acquisition costs per subscriber dived from 4,004 pesos in April to 691 pesos in December. A full-year profit contribution from Smart this year should help PLDT make a dramatic improvement in its bottom line. A consensus of analysts is expecting earnings per share of 19.83 pesos for this year, rising to 31.24 pesos for next year, according to Thomson Financial I/B/E/S. The stock's last close of 710 pesos would put it on a pricey 35 times this year's expected earnings or a more reasonable 22 times next year's. Investors' biggest concern has been PLDT's high gearing with debt running at 2.11 times equity at the end of last year. While last year only two billion pesos of free cash-flow was available for debt reduction, this year the figure should be at least 9.5 billion, said Mr Pangilinan. In addition the flotation of Smart is 'on our radar screen. Maybe not this year, maybe in the future'. Proceeds from the float could also be used to pay down debt. Graphic: phil10gbz
