The Philippine stock market is currently in the middle of the second quarter earnings season. In my opinion, among the numerous sectors in the market, the telco sector delivered one of the best quality earnings results. This has made me more bullish on two listed telco stocks, PLDT and Globe, which many analysts have previously advised investors to avoid. Here are the reasons why I am more bullish on the sector:

More Filipinos are now willing to pay for internet access. This is evidenced by the increasing average revenue per user (ARPU) of mobile phone subscribers beginning 2017. Although the increase in ARPU was weaker and more volatile for PLDT’s Smart, Talk ‘N Text and Sun Cellular brands, all three brands finally showed strong growth in this area in the second quarter of this year following the launch of PLDT’s highly successful free YouTube promo in April. As a result, PLDT saw wireless data usage jump by 35 percent during the second quarter versus the first quarter, while top-ups of both existing and new subscribers increased.

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Data usage still has room to grow. Although PLDT and Globe have a total of 120 million cellular phone subscribers, more than the population of the Philippines, not all subscribers currently access the internet using their phones. Based on PLDT’s estimates, approximately 60 percent of its cellular subscribers own smartphones, while close to 60 percent use mobile data. This means there is still a huge untapped market for mobile data, providing both telcos ample room for growth.

Fast growing data revenues now account for a bigger chunk of revenues. Although both PLDT and Globe have been enjoying rapid data revenue growth for several years, the strong performance was tempered by shrinking revenues from voice calls and text messages, thus affecting the total. This was especially true for PLDT which took a while to realize it needed to focus on growing its data business more rapidly to arrest the decline of total revenues. However, as of the first half of this year, fast growing data revenues already accounted for 54 percent of PLDT’s revenues and 58 percent that of Globe’s.

Because of the said factors, I now have a stronger conviction that profits of both PLDT and Globe will already be on a sustainable uptrend making an investment in both telco stocks more attractive.

At this point, the entry of a third telco player remains a threat to both PLDT and Globe. However, the barrier to the third telco’s entry is significantly much higher today than it was in 2016 when President Duterte first talked about it.

Aside from the fact that PLDT and Globe are now much stronger profit-wise, both have spent more than P100 billion each since 2016 to improve the quality of their infrastructure and service. Both are also committed to spend at least P40 billion annually on capital expenditures in the next few years to continuously enhance service quality.

The cost of mobile data is also much cheaper today than it was in 2016. For example, with the ongoing promotions of PLDT and Globe, prepaid subscribers effectively pay only P12 to P17 per gigabyte, making the cost of mobile data in the Philippines among the cheapest in Asia. In 2016, the cost was around P150 to P200, a report in Tech in Asia showed.

With the high capex spending requirement and low cost of data, this means anyone who wants to compete with PLDT and Globe will need very deep pockets. Aside from having to spend much more than P40 billion pesos annually, the third telco player will need to price its mobile data service below P12 pesos per GB requiring much higher volumes to become profitable.

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