PLDT (TEL) – Deep in the Woods

It was reported by Inquirer.net on March 9, 2018 that telco giant PLDT  (TEL) sounded off hope hat its business struggles were coming to a close this 2018.

Undescripts.com believes that it won’t be so.  Its balance sheet would show that as of the end of 2017 it is still loaded with debt.  PLDT’s total debt stood at 348 Billion pesos while its capital stood at 111 Billion giving it a total debt to equity ratio of 3.14.  PLDT is heavily leveraged.  In 2011, PLDT was just leveraged to a ratio of 1.61 total debt to total equity.

Meanwhile, its cash flows from operations is dwindling.  For the year 2017 it generated cash flows from operations of 58.6 Billion, 27% lower compared to the cash it generated from operations in 2012 when PLDT generated 80.4 Billion.  PLDT’s slowing cash flow generation ability has been due to the fact that it has not respond well to the needs of the time.  This is very evident in the erosion of its revenue. From 170.8 Billion for the year 2014 its revenue for the year 2017 was just 160 Billion down 6% from the 2014 level.

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PLDT did not re-invest enough its earnings during the good years to attune its capabilities with the time, instead PLDT distributed it mostly to its stockholders.  It was made a milking cow by its controlling stockholder, the First Pacific Co. Ltd..  In its full-year 2017 results presentation, PLDT boasted that over the last 13 years it has distributed dividends totaling 400.6 Billion or an average of 30.8 Billion per year to its stockholders.

PLDT has put itself deep in the woods – huge debt load, dwindling revenue and cash flows from operations, and huge capital expenditure requirements to update its capability with the demands of time.  PLDT has no where to go to funds its capital expenditure (capex) requirements.  It is already debt laden, its capability to add more debt to fund its capex is now constrained.  To go deep on its balance sheet its remaining material investments is now Rocket Internet with a carrying value of 12.8 Billion Pesos and MediaQuest PDRs with a carrying value of 10.8 Billion as of end of 2017.  The two assets are the only material investments left available for sale to fund capex requirements. Undescripts.com reported this earlier.

Undescripts.com believes that eventually PLDT will have to lower its dividend payout.  As of end of 2017 at a price of 1,480, PLDT’s (TEL) dividend yield stands at 5.1%.  It is of our opinion that to sustain such dividend yield, the market has to price PLDT (TEL) lower at around 990 or maybe higher at 1,000.  At that price we recommend to include it in your portfolio.

SM Prime Holdings Inc. (SMPH) – Real Estate Domination

SM Prime Holdings (SMPH) reported an impressive 15.8% growth in net income.  The reported net profit results show SMPH domination in Philippine real estate.

The growth came mostly from the expansion of malls/retail space for rent and the consistent 7% annual growth in same-mall-sales.  In 2017, it opened 6 new malls adding a gross floor area of around 377,000 square meters. Same-mall-sales represents the growth of consumption spending of the Filipinos.  It is a reflection of the growth in spending power of the population as a result of the growth in the over-all economy.

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SMPH as of year-end 2017 has 67 malls in the Philippines and 7 malls in China.  The malls lay the “golden egg” for SMPH.  The malls are cash gushers creating money year after year after they have been established.   The more mature the mall is, the more it is profitable for SMPH.  The most mature malls of SMPH creates an almost free money to SMPH.  In those mature malls, SMPH has long recovered their costs and the revenue they are generating are almost free of costs.  This makes SMPH the most profitable Philippine real estate company.  SMPH has in 2016 a gross margin percentage of 84.10 meanwhile competitors Ayala Land (ALI) had 34.91, Filinvest Land (FLI) had 49.55, and Megaworld Corp. (MEG) had 56.30.

The profitability of SMPH strengthen its balance sheet. As of year-end 2017 it has a net debt to equity ratio of 0.56 as compared to ALI’s 0.77.  This means SMPH is less reliant on debt to expand. Being a pioneer in mall development in the Philippines gives it a unique insight and capability to know when and where to build a mall in the Philippines. And once it builds a mall, that mall will print money for SMPH forever and long after the costs are recovered it will still mint money and almost for free for SMPH.  This cycle repeats again and again creating a domination in Philippine real estate for SMPH.

The capability of SMPH to dominate Philippine real estate is being chased by institutional, mutual fund, and retail investors resulting to a Price-to-Earnings (PE) ratio of 39.37, the highest among its peers and making the SMPH the largest real estate company in terms of market value. SMPH has now a market capitalization of 1.02 Trillion Pesos dwarfing ALI’s 680.73 Billion Pesos market capitalization.

Clearly the ability of SMPH to dominate the Philippine real estate justifies its expensive value, however, it is without challenges ahead. Its present valuation factors in future growth prospects.  Its future growth prospects is being challenged by expensive land banking.  This challenge is being manifested in a recent report of the Inquirer titled “SM bags seafront property for 18B.”  It was reported that the price SMPH paid for the said lot is at 50% premium from the offer of ALI.

While it is clear that SMPH has the ability to dominate the real estate market it is also clear that it is being disrupted by increase in market values of land and to a lesser extent by technology.  So we recommend that if its stock price dip by 10% make an opportunistic buy.  It is presently trading at 36 just 9.32% below it 52-week high of 39.70.