Telcos face decline in profit margins

The country’s two telco players will likely see profit margins decline in at least the next two years as they seek to lure customers in the fast-growing data business, according to Fitch Ratings.

The credit watchdog said in a statement Monday that the combination of high capital spending and falling profitability would weigh on the outlook for both PLDT Inc. and Globe Telecom.

Of the two companies, Fitch said PLDT was “more vulnerable to margin dilution as it incurs higher marketing costs and handset subsidies in a bid to regain lost market share.”

Fitch said Globe’s revenue growth would decline to the mid-single-digits in 2017 to 2018— this growth was 16.2 percent last year. Globe would still outpace that of “PLDT’s low-single-digit level,” Fitch said.

Both telcos, meanwhile, would still pull in large profits.

According to Fitch’s forecast, the Ebidta margin of the county’s telco sector was estimated lower at 37 percent to 38 percent— compared to as much as 41 percent in 2015.

The developments were in line with the digital shift that is opening up new areas of opportunity—and challenges—for telco players around the world.

The move was mainly driven by explosive demand for internet applications like social media, online video streaming and instant messaging as consumers shift away from telco services like traditional text messaging and calls. The prevalence of inexpensive smartphone options has likewise hastening this trend.

According to Fitch, the rating headroom was low for PLDT (BBB/Stable) and Globe Telecom (BBB-/Stable). It noted that adjusted net leverage was “likely to deteriorate to around 3 times for PLDT (2015: 2.2 times) and 3.3 times for Globe (2015: 1.9 times).

Combined annual capital spending was seen going up between P93 billion and P96 billion, Fitch said, compared to P75 billion in 2015 as both PLDT and Globe upgrade to LTE.

PLDT and Globe earlier said spending would go up as they roll out new telco frequencies they gained access to following a co-use agreement and subsequent acquisition of San Miguel Corp.’s telco unit last May.

The chief target was most of the 700 Megahertz LTE frequency that SMC was not using. They said the 700 MHz was ideal to efficiently cover large areas and penetrate building walls with high-speed internet.

SMC exited the telco business after talks with prospective Australian partner Telstra Corp. collapsed and as it grew concerned over legal threats from PLDT and Globe, SMC president Ramon S. Ang said earlier.