Morgan Stanley Reinforce Positive Outlook on PH Telco Play, Globe Stock Earns Ratings Upgrade

A large foreign investment house posted its positive outlook for the Philippine telco sector and Globe Telecom in particular for 2018. Morgan Stanley released its research paper this month, entitled “ASEAN Telcos 2018 Outlook”, comparing Globe with other telco players in the ASEAN region with optimistic results.

Morgan Stanley noted that “Globe has been winning market share from competition in the mobile and broadband segments, which has resulted in Globe outperforming competition by 6% in 2017. Unlike competition, we like that Globe has made efforts to increase its capex to densify the network in preparation for 4G. We recognize the risk of a third player but it will be 2-3 years before a new player is operational. In the meantime, we see Globe’s effort in driving improvements in the network as a positive for growth.”

As a result, Morgan Stanley upgraded the Philippines from its least-preferred market to rank in line with Malaysia and Thailand, at the same time upgrading Globe shares from underweight to overweight. As defined by Morgan Stanley, a stock rating of overweight means that the stock’s total return is expected to exceed the average total return of the Morgan Stanley analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Morgan Stanley upgraded Globe on the back of lower depreciation charges, increases in data monetization and improvement in customer growth.

Morgan Stanley said it forecasts Globe Telecom’s data revenues to grow at an 11.5% compounded annual growth rate (2016 to 2019) driven by strong growth in mobile data traffic from a low base, and improved data monetization as a result of lower mobile competition in the market. Also, Morgan Stanley forecasts data revenues to account for 73% of wireless revenues by 2020, up from 54% in 2015.

“The Philippines has historically been categorized as a highly competitive telecom market, despite being a duopoly. However, competition in the mobile space moderated in 2017, but we expect it to rise again in the near future, as operators go after fixed broadband market share and as risk of a third player looms,” the Morgan Stanley report noted.

The research paper also highlighted that Globe has significantly increased capex to improve its network compared to other countries in the ASEAN region. The study indicated that though the capex cycle is an important underlying driver to boost the stock price performance of the company, it can also decrease the return of invested capital (ROIC) and can limit capital distribution. The capex cycle is driven by three key points, namely technology upgrades, network expansions and fixed network investments.