PLDT Inc.’s sizable budget overrun on capital expenditure could stretch its balance sheet and weigh on its credit profile, while governance risks arising from the excess expenses might add to the stress, a major credit rating agency said Thursday.
“PLDT can only tolerate a small amount of additional cash outflow from the budget overrun before it erodes all leverage headroom at the current rating [BBB+/stable/–]. That’s because the Philippines-based telecom company’s balance sheet has already been worn thin from capex and working capital cash drain in the past two years,” S&P Global Ratings said in a report.
“We estimate the company can withstand no more than an incremental P10-billion excess spending over our base case cash capex of P75 billion to P80 billion in 2023. After this, its debt-to-EBITDA ratio could deteriorate to beyond the downgrade trigger of 2.5x,” it said.
“Based on the company’s worst-case scenario, we estimate the debt-to-EBITDA ratio could reach 2.8x to 2.9x in 2023. That is if the full P48-billion overrun from 2019 to 2022 represents an extra cash outflow, resulting in incremental debt to fund it,” S&P said.
S&P said the capex budget overrun also suggested management and governance shortcomings. “The ability of PLDT’s management to arrest higher-than-budgeted capex on a timely basis, and the ability of the company’s board to provide sufficient oversight have come into question. This is given that the overrun stems from capex dating as far back as 2019. Investigation so far by the company has not uncovered any fraudulent transactions or procurement anomalies,” it said.
S&P said PLDT had some levers that could mitigate the hit to its credit standing. The company was contemplating on another tower sale in 2023, for a portfolio of up to 1,350 towers. This would be on top of the recently announced sale of 650 towers.
The 2022 sale and leaseback of close to 6,000 towers brought in about P77 billion in proceeds and rendered some financial flexibility to the company. PLDT is also undergoing a management reorganization to address weaknesses that had allowed such budget overruns to occur, according to S&P.
Meanwhile, PLDT said Thursday it would maintain dividend payout this year to appease shareholders and investors. The company said it expected to be able to pay the balance of the regular dividend for 2022 at P45 per share and the remaining special dividend of P42 per share.
This would bring total dividends for 2022 to P134 per share or 88 percent of 2022 expected earnings.
PLDT said its overall business remained “healthy and robust” even as it continued to address its elevated budget spending and underwent a comprehensive review.
PLDT chairman Manuel Pangilinan said earnings before interest, taxes, depreciation and amortization would remain unaffected by capex overrun and was on track to hit P100 billion as originally indicated. He said telco core net income was expected to reach between P32.6 billion and P33 billion this year as guided.
Pangilinan reiterated that the company’s ongoing review had uncovered “no fraud, no anomalies, no evidence of overpricing, and no unrecorded transactions in relation to the overrun.”
“The bulk of the P48-billion capex overspend involves the procurement of network equipment necessary to provide stronger connectivity to subscribers, specifically 5G cell sites for our mobile network and fiber rollout. There will be no write-off of these assets,” Pangilinan said.
PLDT president and chief executive Al Panlilio said among the factors of overspend are intense competition with the entry of DITO Telecom and the emergence of a competitor in the fiber space, Converge ICT Solutions Inc. to regain network leadership following years of underinvestment in capex.
He said the occurrence of the COVID-19 pandemic and the resultant lockdowns and quarantines, which required the installation of speedy fiber connections in millions of households for work and school, pushed network teams to fast-track rollouts.
“However, to the extent of the capex ordered, we plan to reduce fresh capex starting in 2023. Thereafter, we expect capex to reduce steadily. 2023 will be a year of consolidation as we continue to strengthen and grow the business. We strive to be better,” said Panlilio.
PLDT chief legal counsel Marilyn Victorio-Aquino said negotiations with vendors were ongoing, while simultaneous reviews of network project monitoring and process flows were being undertaken with a view to improving them.
“Rest assured that we will provide additional disclosures in due course. What we want to avoid is premature disclosure, that could harm the public shareholders,” she said.
