PLDT, Inc.

MON 19 OCT 2020

Fixed broadband business well

positioned for growth
Ramping up fixed broadband subscriber acquisition. After connecting only around
119,000 new subscribers in 2019 and 174,000 in 1H20, management said that TEL
connected around 80,000 new subscribers in July. Management also mentioned that the
company is targeting to hit 90,000 to 100,000 new monthly subscriptions going forward,
BUY
which is slightly higher than the 70,000 monthly subscriber additions of its more aggressive
competitor Converge (CNVRG). Management explained that fixed broadband subscriber TICKER: TEL
growth slowed down during the past two years because of the Department of Labor
and Employment (DOLE) order which disallowed the company from hiring contractors FAIR VALUE: 1,640
to connect new subscribers. Nevertheless, during those two years, TEL hired and trained CURRENT PRICE: 1,294
enough employees to address the growing demand for fixed broadband services. TEL also
said that it has enough capacity to serve the market. As of end June 2020, TEL had 7.8Mil UPSIDE (%): 26.74
homes passed and 3.7Mil ports available, which is much higher than that of CNVRG which
has 4.1Mil homes passed and 2.5Mil ports.
SHARE PRICE MOVEMENT
Large addressable market to fuel demand. According to Media Partners Asia’s (MPA)
analysis, the Philippines has approximately 3.5Mil residential fixed broadband subscribers
as of end 2019, accounting for only 14.1% of total households. Meanwhile, those with 120

more reliable fiber connections are only 1.5Mil or 6.8% of total households. The very low
penetration rate should provide TEL and the other telco operators ample room to grow 110
as the market is far from being saturated. As such, despite the rapid growth of TEL and
its competitors, the company still has a few more years to enjoy rapid growth without the
need to cut prices or to grab market share from its other competitors. 100

Replacing outdated copper with fiber technology. According to TEL’s management, a

large part of user discontent is coming from subscribers who are still using DSL technology.
90

As part of the initiative to improve user experience, TEL is implementing an 18-month

fiber migration program, where the company plans to convert all their DSL cables to fiber. 80
Around 600,000 subscribers who are still using the company’s outdated DSL technology 19-Jul-20 19-Aug-20 19-Sep-20 19-Oct-20

will switch to fiber connection for free. At the end of the program, all of TEL’s subscribers TEL PSEi
will enjoy fiber internet connection, which is much more reliable and stable.
Reiterate BUY rating. We reiterate our BUY rating on TEL with an FV estimate of Php1,640/
sh. We continue to like TEL because of a) the strong growth of its mobile data business; ABSOLUTE PERFORMANCE
b) its dominant position in the home broadband business; c) new opportunities in the
enterprise segment, and d) its strong balance sheet. At its current price of Php1,278/sh, 1M 3M YTD
capital appreciation potential is attractive at 28.3% while providing a dividend yield of 5.9%. TEL -7.59 -5.33 29.35
FORECAST SUMMARY PSEi -0.18 -3.13 -24.53
Year to December 31 (Php Mil) 2017 2018 2019 2020E 2021E 2022E
Total Revenues 159,926 162,914 169,187 181,220 193,443 206,318
% change y/y (3.2) 1.9 3.9 7.1 6.7 6.7
Service Revenues 151,165 152,369 161,355 171,661 183,501 196,048 MARKET DATA
% change y/y (3.8) 0.8 5.9 6.4 6.9 6.8
EBITDA 66,174 79,229 84,704 82,124 86,202 92,662 Market Cap 276,119.28Mil
% change y/y 8.2 19.7 6.9 (3.0) 5.0 7.5 Outstanding Shares 216.06Mil
EBITDA margin (%) 43.8 52.0 52.5 47.8 47.0 47.3
EBIT 9,511 23,032 39,401 31,744 35,079 38,676 52 Wk Range 805.00 - 1,487
% change y/y (61.5) 142.2 71.1 (19.4) 10.5 10.3 3Mo Ave Daily T/O 223.22Mil
Net Income 13,466 28,232 22,786 20,967 24,290 27,265
Net Income (Recurring Core) 23,600 24,047 27,080 25,763 28,786 31,761
% change y/y 16.8 1.9 12.6 (4.9) 11.7 10.3
Recurring Core Net Margin (%) 15.6 15.8 16.8 15.0 15.7 16.2
EPS (Php) 61.6 130.1 104.0 96.8 112.2 125.9 Adrian Alexander Yu
% change y/y (33.2) 111.2 (20.1) (6.9) 15.9 12.3 Research Analyst
RELATIVE VALUE
adrian.yu@colfinancial.com
P/E (X) 20.7 9.8 12.3 13.2 11.4 10.1
P/BV (X) 2.6 2.5 2.5 2.4 2.2 2.1 Kerwin Malcolm Chan
EV/EBTIDA (X) 6.3 5.1 5.3 5.4 5.2 4.8
Dividend yield (%) 6.0 5.0 5.6 5.9 6.0 6.6 Research Analyst
ROE (%) 12.5 25.8 20.3 18.3 20.1 21.2 kerwin.chan@colfinancial.com
so urce: TEL, COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

Ramping up fixed broadband subscriber acquisition

After connecting only around 119,000 new subscribers in 2019 and 174,000 in 1H20,
management said that TEL connected around 80,000 new subscribers in July. Management
also mentioned that the company is targeting to hit 90,000 to 100,000 new monthly
subscriptions going forward, which is slightly higher than the 70,000 monthly subscriber
additions of its more aggressive competitor Converge (CNVRG). Management explained
that fixed broadband subscriber growth slowed down during the past two years because
of the Department of Labor and Employment (DOLE) order which disallowed the
company from hiring contractors to connect new subscribers. Nevertheless, during those
two years, TEL hired and trained enough employees to address the growing demand for
fixed broadband services. TEL also said that it has enough capacity to serve the market.
As of end June 2020, TEL had 7.8Mil homes passed and 3.7Mil ports available, which is
much higher than that of CNVRG which has 4.1Mil homes passed and 2.5Mil ports.

TEL is also focused on improving network quality and customer experience to reduce
churn rates or disconnections among its 2.1Mil existing fixed broadband subscribers as
of end June. The company has ramped up its network build to increase capacity and
reduce network congestion in response to the sudden increase in subscriber base. During
its 2Q20 analyst briefing, TEL increased its capex guidance from around Php60Bil to
Php70Bil.

Large addressable market to fuel demand

According to Media Partners Asia’s (MPA) analysis, the Philippines has approximately
3.5Mil residential fixed broadband subscribers as of end 2019, accounting for only 14.1%
of total households. Meanwhile, those with more reliable fiber connections are only
1.5Mil or 6.8% of total households. The very low penetration rate should provide TEL and
the other telco operators ample room to grow as the market is far from being saturated.
As such, despite the rapid growth of TEL and its competitors, the company still has a few
more years to enjoy rapid growth without the need to cut prices or to grab market share
from its other competitors. Based on MPA’s forecast, the number of fixed broadband
subscribers in the country is projected to increase by a 16% CAGR to 8.9Mil households
by 2025.

COL Financial Group, Inc. 2

 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

Replacing outdated copper with fiber technology

According to TEL’s management, a large part of user discontent is coming from subscribers
who are still using DSL technology. As part of the initiative to improve user experience,
TEL is implementing an 18-month fiber migration program, where the company plans to
convert all their DSL cables to fiber. Around 600,000 subscribers who are still using the
company’s outdated DSL technology will switch to fiber connection for free. At the end
of the program, all of TEL’s subscribers will enjoy fiber internet connection, which is much
more reliable and stable.

Reiterate BUY rating

We reiterate our BUY rating on TEL with an FV estimate of Php1,640/sh. We continue

to like TEL because of a) the strong growth of its mobile data business; b) its dominant
position in the home broadband business; c) new opportunities in the enterprise segment,
and d) its strong balance sheet. At its current price of Php1,278/sh, capital appreciation
potential is attractive at 28.3% while providing a dividend yield of 5.9%.

COL Financial Group, Inc. 3

 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

PLDT, Inc. (TEL) INCOME STATEMENT (IN PHPMIL)

2017 2018 2019 2020E 2021E 2022E
COMPANY BACKGROUND
Revenues 159,926 162,914 169,187 181,220 193,443 206,318
PLDT or TEL is one of the two major % Growth -3% 2% 4% 7% 7% 7%
Wireless 87,354 81,349 88,243 92,299 96,386 102,014
telecommunications and digital services
% Growth -12% -7% 8% 5% 4% 6%
provider in the Philippines. Its business is
Fixed Line 63,811 71,020 73,112 79,362 87,115 94,034
primarily divided into two major groups – % Growth 10% 11% 3% 9% 10% 8%
the wireless segment and fixed line segment. EBITDA 66,174 79,229 84,704 82,124 86,202 92,662
Under the wireless segment, the company % Growth 8% 20% 7% -3% 5% 7%
Depreciation (51,915) (47,240) (39,656) (45,122) (48,365) (51,728)
operates three brands (Smart, TNT and
Interest expense (7,370) (7,067) (8,553) (7,939) (7,865) (7,900)
Sun) and services around 70.2Mil mobile Other income (expenses) 11,016 14,166 (257) (1,587) (1,287) (1,287)
subscribers thru voice, SMS and data related EBT 14,569 32,074 32,336 23,976 27,775 31,177
products. Meanwhile, under its fixed line % Growth -34% 120% 1% -26% 16% 12%
network, TEL provides landline, broadband Taxes 1,103 3,842 9,550 3,009 3,485 3,912
Net Income to Equity 13,371 28,175 22,521 20,967 24,290 27,265
and fiber connections to majority of homes
Recurring Core Income 23,600 24,047 27,080 25,763 28,786 31,761
and offices in the country, in addition to its % Growth 17% 2% 13% -5% 12% 10%
international and national call services. BALANCE SHEET (IN PHPMIL)
2017 2018 2019 2020E 2021E 2022E
Cash 33,979 52,819 24,683 29,403 28,520 25,233
REVENUE BREAKDOWN
Accounts Receivables 33,761 24,056 22,436 23,869 25,515 27,260
Inventory 3,933 2,878 3,412 3,040 3,235 3,430
Other Current Assets 17,996 8,563 11,489 12,683 13,495 14,337
11% Total Current Assets 89,669 88,316 62,020 68,995 70,765 70,260
PPE 186,907 195,964 232,134 245,064 258,776 271,431
Other Assets 182,868 180,875 198,401 201,238 202,715 204,329
15% 37% Total Assets 459,444 465,155 492,555 515,296 532,256 546,020
20%
Accounts Payable 60,445 74,610 77,845 77,412 79,321 79,303
ST Debt 90,740 95,724 100,815 115,267 122,414 129,877
33% Current Portion of LT Debt 14,957 20,441 19,722 19,835 22,609 17,030
Other Current Liabilities 1,949 1,833 2,851 2,851 2,851 2,851
31% Total Current Liabilities 168,091 192,608 201,233 215,366 227,196 229,061
34% LT Debt 157,654 155,835 172,834 176,732 174,123 177,093
19% Other Liabilities 22,516 17,641 18,355 18,355 18,355 18,355
Total Liabilities 348,261 366,084 392,422 410,453 419,674 424,509
Minority Int 4,341 4,308 4,303 4,303 4,303 4,303
Wireless - Data Wireless - Non-Data Shareholder's Equity 106,842 94,763 95,830 100,541 108,279 117,208
Wireless - Data Wireless - Non-Data
Fixed Line - Data Fixed Line - Non-Data CASHFLOW STATEMENT (IN PHPMIL)
Fixed Line - Data Fixed Line - Non-Data
2017 2018 2019 2020E 2021E 2022E
Operating CF 56,114 61,116 73,390 81,207 83,607 88,263
Net income 10,019 20,371 30,239 20,967 24,290 27,265
Non-cash items 59,921 49,903 56,127 53,648 56,427 59,985
Change in working cap (13,826) (9,158) (12,976) 6,592 2,890 1,013
Investing CF (21,060) (25,054) (84,170) (56,303) (60,238) (62,704)
PPE (36,616) (47,247) (88,246) (58,365) (62,390) (64,696)
Dividend received 833 0 0 0 0 0
Interest received 1,217 1,115 1,723 1,758 1,849 1,688
Other non-current assets 13,506 21,078 2,353 304 304 304
Financing CF (40,319) (18,144) (15,757) (20,184) (24,252) (28,846)
Cash dividends (16,617) (13,928) (15,592) (16,256) (16,552) (18,337)
Other financing CF (27,867) (4,242) 9,382 (3,928) (7,700) (10,509)
Net effect of forex rate changes (552) 831 (748) - - -
Change in Cash (5,817) 18,749 (27,285) 4,720 (883) (3,287)
Cash (Begin) 38,722 32,905 51,654 24,369 29,089 28,206
Cash (End) 32,905 51,654 24,369 29,089 28,206 24,919

COL Financial Group, Inc. 4

 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

INVESTMENT THESIS: KEY RATIOS

2017 2018 2019 2020E 2021E 2022E
Turnaround efforts in wireless gaining
ROE 13% 26% 20% 18% 20% 21%
ground Mobile Services
TEL’s wireless segment managed to grow by Blended ARPU 150 134 121 126 132 140
9.5% y/y in 1H20 , much faster than the 4.1% Subscribers ('000) 58,294 60,499 73,118 73,118 73,118 73,118
y/y growth recorded a year ago. The strong Home Broadband (Php)
performance is attributable to its higher Subscribers ('000) 1,951 2,026 2,161 2,161 2,161 2,161
Blended ARPU (Php) 924 1,116 1,130 1,258 1,447 1,591
denomination data packages, which entails
CorpData & DataSvc (Mil) 19,636 23,026 24,480 26,928 30,159 33,175
higher top-ups and longer validity loads. This % Growth 15.5% 17.3% 6.3% 10.0% 12.0% 10.0%
resulted in an increase in mobile subscribers EBITDA Margin 44% 52% 52% 48% 47% 47%
and ARPU. NPM 16% 16% 17% 15% 16% 16%
CA/CL (X) 0.5 0.5 0.3 0.3 0.3 0.3
D/E Ratio (X) 1.6 1.6 1.7 1.7 1.6 1.5
Fixed line segment posed for significant Net Debt/EBITDA (X) 2.1 1.6 2.0 2.0 2.0 1.8
growth
MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
TEL’s fixed line segment, composed mainly
of the Home and Enterprise businesses, Acquired 50% of SMC Vega telecom for Php 35 Bil 05/31/2016
now accounts for 44.6% of the total service
revenues. Both Home and Enterprise segments Major management resturcuring 11/15/2016
are forecasted to grow for the foreseeable
future driven by strong demand for data and Sold 25% equity stake in Beacon for Php26.2 Bil 05/30/2016
TEL’s improving infrastructure. TEL is expected
to maintain its lead as competitors will need Completed divestment of 25% equity stake in Beacon for Php21.8Bil 06/13/2017
to invest in a significant amount of capex to
replicate TEL’s current infrastructure. Sold 7.5Mil Rocket Internet shares for Php11.4 Bil 05/08/2018

KKR, Tencent and IFC to infuse US$215Mil in Voyager for >50% stake 11/01/2018
Increasing share of data to help profits
turnaround JGS acquires around US$138.83Mil or 3.26% of TEL's outstanding shares
08/01/2020
As of 1H20, data already contributed (7Mil shares at US$19.7/sh)
approximately 70.7% of total service revenues. SEC approved creation of JV, Telecommunications Connectivity Inc, between
01/22/2020
The continued growth in the company’s data TEL, GLO, and DITO
revenues should completely offset the decline
Partners up with AI platform, Senti AI to create more relevant solutions 03/04/2020
in their legacy business (SMS, Voice, and ILD).
Voyager commits up to US$120Mil to support PayMaya's rapid growth 04/06/2020

TEL issues US Dollar-denominated 10-year and 30-year bonds worth

06/23/2020
US$600Mil

COL Financial Group, Inc. 5

 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

Valuation VALUATION ASSUMPTIONS

Methodology Risk premium

Risk free rate
9.0%
4.0%
Beta 0.95
Cost of equity 12.6%
Cost of debt 6.5%
Tax rate 30.0%
WACC 8.4%
Terminal growth rate 2.0%

PV (2020-2024) 116,123
PV of term Value 406,402
Enterprise value 522,525
Less: Net Debt -167,988
Equity value 354,537
Number of outstanding shares (Mil) 216
Equity value per share 1,640

COL Financial Group, Inc. 6

 FIELD NOTES I TEL: FIXED BROADBAND AND BUSINESS WELL POSITIONED FRO GROWTH

MON 19 OCT 2020

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7