Competition, 4G investment to pressure telco margins — Fitch
REVENUE growth of Philippine telecommunications companies is expected to come under pressure next year, with EBITDA (earnings before interest, taxes, depreciation and amortization) margins shrinking the most among Asian markets amid fiercer competition and higher capital expenditures.
Fitch downgraded the credit outlook of the Philippine telecommunications industry late last month to “negative,” from “stable” citing increasing competition that is expected to push revenues lower and force companies to spend more to expand and upgrade to long- term evolution network (LTE) and fiber infrastructure.
“Fiercer competition and rising capex needs will put pressure on the credit profiles of most Asian telcos over the next year. We have a negative outlook on the telecoms sectors in India, Singapore, Malaysia, Thailand and the Philippines,” the credit rater said in a statement, while noting that South Korea, Indonesia, China and Sri Lanka are all on stable outlook.
“Weak revenue growth will result in a hit to the profit of most Asian telcos. EBITDA margins are likely to shrink the most in the Philippines and India, where telcos still derive the majority of their revenue from voice and text service,” it added.
Chinese and South Korean telcos’ profitability will remain stable, reflecting weaker competition and lower marketing and handset subsidy costs. Chinese telcos will benefit further from lower tower lease rental costs, it added.
For India, Singapore and Malaysia, Fitch said competition is “likely to intensify” with new entrants poised to offer cheaper tariffs to poach customers from incumbents. It said that competition could be the most intense in India, where a wellcapitalized new entrant, Reliance Jio, is offering free voice and text services and cheaper data tariffs than the incumbents. In Malaysia, the fixed-line market leader, Telekom Malaysia, is making a move into the wireless market, which will prevent a recovery in the revenue of wireless incumbents next year, while, Singapore will soon auction sufficient spectrum to allow the entry of a fourth mobile network operator.
“Rising competition will add to pressure on revenue, which Fitch expects to grow by just 0-5% in most Asian telco markets in 2017. Data usage will continue to rise strongly, but most telcos are pricing data in such a way that increased usage is not translating into similar revenue growth,” Fitch said.
The trend of falling data tariffs and the substitution of data for voice and text will continue in most markets, Fitch said. Fixed- line and international long- distance services are in a structural decline, with China as the only market where it expects higher data usage to translate into growth in average revenue per mobile user.
The debt-watcher in its statement said rising capex needs will mean that many Asian telcos will have minimal- to- negative free cash flow next year.
In particular, “Thai, Philippine and Indian telcos are likely to have the highest capex/ revenue ratios, at around 28%-30%, as they strengthen 4G networks in response to fast-growing data consumption and the rising importance of network quality.” In contrast, Chinese telcos’ capex could decline by 10% as their 4G development cycle has peaked.
“We expect industry consolidation in India, Indonesia and Sri Lanka, as weaker telcos exit the market or seek M&A to strengthen their competitive position. The Sri Lankan market looks particularly crowded and ripe for consolidation. Debt- funded M& A could threaten the ratings of acquirers in these markets,” Fitch added.
Among the Fitch-rated Asian telcos, Singapore Telecom Limited (A+/Stable), Telekom Malaysia Berhad (A-/Stable), Reliance Communications ( BB-/ Stable), Global Cloud Xchange (B+/Stable) and PT Tower Bersama Infrastructure Tbk (BB/Stable) have low ratings headroom.
In its 2017 Outlook: Philippine Telecommunications Services, the credit rater said it is revising the sector outlook to “negative” from “stable,” reflecting its belief that domestic mobile competition will intensify further as the market- leader PLDT takes a more aggressive approach.
“We expect telecom operators to offer cheaper data pricing and higher handset subsidies — alongside an accelerated 4G rollout — to drive data adoption in a predominantly prepaid market,” Fitch said then. If competition on the data segment eases, Fitch said the industry outlook could be revised to “stable” but is “unlikely.”
In September, Fitch Ratings downgraded the credit outlook on PLDT, Inc.’s Long-Term LocalCurrency Issuer Default Rating ( LC IDR) to “negative” from “stable” citing PLDT’s divestment, the expected decline of its EBITDA, heavy investments, a forecasted easing in merger & acquisition risk, and its market position as the top leader in the local telco industry.
It affirmed the telco’s LC IDR at ‘ BBB+.’ It also has affirmed PLDT’s Long-Term ForeignCurrency IDR ( FC IDR) and its foreign- currency senior unsecured rating at ‘ BBB,’ as well as its National Rating at ‘AAA (phl).’
Fitch in that report said PLDT is “more vulnerable” to margin dilution as it incurs higher marketing cost and handset subsidies in a bid to regain lost market share. PLDT is also more reliant on legacy services; it derived 53% of its first half revenue from voice and messaging services compared with Globe’s 42%. Globe’s post-paid subscribers have a higher average revenue, which Fitch said “should translate into stronger data monetization and market share gains.”