Recession - Philippines

Fitch says local telcos to ride out global downturn

CREDIT watcher Fitch Ratings expects the Asia-Pacific telecommunication sector to ride out the global downturn, in the process retaining its "stable" credit outlook for local companies Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom, Inc.

"Fitch believes that PLDT and Globe are well positioned to weather the ongoing downturn, noting their dominant market positions and robust balance sheets," the ratings firm said in its "Asia-Pacific Telecoms: Credit Outlook 2009" report released yesterday.

Fitch noted "promising growth outlook for consumer broadband services" and the "benign regulatory regime [that] effectively supports the major operators," even as it also pointed to "higher execution risks as operators develop new growth engines," "industry maturity raising the risk of acute competition," and "increased shareholder focus of major operators."

With 19 out of the 24 issuers bearing a stable outlook, the credit outlook for the Asia-Pacific is stable, Fitch said.

"However, Fitch cautions that the impact of the current downturn is likely to be very different to previous recessions ... The global nature of the current economic downturn suggests that slower corporate activity and rising unemployment will have a negative impact on usage levels and subscriber numbers and tariffs could face downward pressure as operators compete to retain/attract a more price-sensitive consumer," it said.

Fitch noted the entry of PLDT into call centers, which, it said, "represents a significant shift from its core telecom operations."

"On the outsourcing front, Fitch notes that near-term prospects are challenging in view of weak macroeconomic conditions in major end-markets such as the United States. However, longer-term prospects are intact, with the Philippines becoming an important outsourcing destination," it said.

Ayala-led Globe has announced a 16% cut in capital spending for this year, after net profits declined by a tenth. Globe pegged its capital expenditures for the year at about $350-300 million. PLDT has already announced a two-thirds increase in its borrowings for this year to P5 billion. Fitch expects that PLDT will sustain spending at similar levels from the previous year, or about $600 million.

"Both companies generate positive free cash flow, supported by moderate capital intensity, and consequently have limited external funding requirements. Moreover, both PLDT and Globe are beneficiaries of a relatively inactive regulatory regime, which effectively favors the leading operators as it facilitates little change to the existing industry structure," Fitch said.

"With penetration of SIMs (subscriber identity modules) having reached about 71% ... the Philippine cellular market is approaching maturity in terms of addressable market. Although Fitch expects growth to remain modest, cellular services are expected to underpin cash flow stability for the major operators over the medium term," it said.

Fitch also expects a steady flow of dividends from PLDT and Globe. "The agency expects that both companies will continue to return excess cash to shareholders in 2009, in the absence of any major M&A activity or sharp deterioration in the operating environment," it said.

Fitch also noted that broadband services, which comprise a substantial portion of PLDT and Globe’s spending for 2009, "are growing strongly off a small base."

Globe and PLDT officials were not immediately available for comment.