Going the Distance in the Philippines

01/10/2008 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says a leading Filipino telecom company offers a good combination of growth and value.

If China is Asia’s ultimate growth story, the Philippines must surely qualify as the region’s biggest turnaround story. Long plagued by political instability and disastrous economic policies, the Philippines is finally getting its act together.

President Gloria Macapagal Arroyo, an economist by training, has taken a series of bold steps to overhaul the country’s economy since her election in 2004. Normally, raising taxes is a recipe for disaster. But in the case of the Philippines, the country simply wasn’t collecting enough tax revenue due to corruption, tax evasion and the like. By closing egregious tax loopholes and introducing a sales tax, Arroyo has helped bolster the country’s finances.

Economists expect GDP growth of nearly 7% this year, and foreign investment capital is pouring into the country. Inflation is well below 3% and the country is running a current account surplus of close to 6% of GDP.

Philippine Long Distance Telephone (NYSE: PHI) offers a full range of telecom services. It is the leading provider of wireless telecom services in the Philippines with nearly a 60% market share. Its mobile subsidiary Smart Communications has 28.3 million mobile subscribers.

PHI reported better-than-expected third-quarter results in November, with net income growing 13% before extraordinary items. Core profit for the quarter was 9.1 billion Philippine pesos, or $211 million, on revenue of 34.7 billion pesos. That works out to a healthy 26% net profit margin.

The company also raised its forecasts for full-year earnings to 35 billion pesos ($840 million). PHI should be able to deliver about 20% annualized earnings growth over the next two years, according to Credit Suisse.

At a recent $75, PHI is trading at 16x estimated 2008 earnings and roughly eight times earnings before interest, taxes, depreciation, and amortization (EBITDA). Investors in PHI also enjoy a dividend yield of more than 5%.

Those numbers put PHI among the cheapest names in the emerging markets telecom universe. By comparison, China Mobile (NYSE: CHL) sells for 35x earnings and more than ten times EBITDA. Of course, China Mobile is growing at a faster clip, but PHI still has plenty of room for growth.

Wireless penetration rates in the Philippines are among the lowest in Asia, suggesting considerable room for future growth before the market becomes saturated. Roughly half of the Philippines population owns a mobile phone, compared with penetration levels of 90%+ in countries like Singapore and South Korea.

There’s an even bigger opportunity for PHI’s broadband business, which accounts for just 5% of the company’s revenue at the moment. PHI has just 500,000 broadband customers, in a nation of 90 million people.

After a long stretch of good performance in the past few years, it’s getting somewhat tougher to find attractive names in emerging markets. PHI represents a compelling combination of growth and value.

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