A collective abdication of risk management is the precursor to most crises. At peaks in sentiment, not only do we fail to scrutinize, but we feel prudence is unnecessary, if not counterproductive. As a result, we take our greatest risks while paying the least attention—Peter Atwater
PLDT’s ‟Budget Overrun‟ Boomerang: Net Income Takes a Dive in Q4, Weighs on Annual 2022 FS as Costs Soared; Ominous Transparency Issues
PLDT’s Episode Showcases the Need for More Transparency in the Published Financial Statements of Listed Firms
Inquirer.net March 23: MANILA –PLDT Inc. saw its net income plunge by 60 percent to P10.49 billion last year after incurring a P48-billion budget overrun, which the telecom giant attributed to “over orders” of 5G technology. Total revenues, meanwhile, were up 6 percent to P205.25 billion for the period. Service revenues climbed by 4 percent to all-time high P190.1 billion last year.
The PLDT's controversial "budget overrun" provides one critical lesson: published Financial Statements by listed firms may neither be transparent nor reliable. Since the controversy occurred in 2019, that signified four years of warped or distorted data—understated costs and overstated income.
And though the largest telco firm declared that the incident involved "no fraud or bad faith," it signified a critical lapse in risk management.
The lack of scrutiny or the absence of the exercise of prudential controls showed that the management exposed shareholders and other stakeholders (suppliers, lenders, employees, and others) to unnecessary financial and economic risks.
Transparency issues from the unfortunate imbroglio may also cloud or taint the integrity of the capital markets.
While the laxity of controls may be a symptom of the prevailing environment from the BSP’s easy money regime—as likely exhibited by the frequent marking-the-close incidents in the PSEi 30 index—it also demonstrates the snowballing fragility in the financial and economic system.
And so, even if authorities have turned a blind eye to the revelation of possible corporate malfeasance, the firm has been slapped with a class action lawsuit abroad.
Since actions have consequences, aside from the legal ramifications, out-of-budget expenditures have emerged to impact the firm's financial statement.
The "Budget Overrun" Boomerang; The Story Behind PLDT’s Revenue Growth
Figure 1
Nonetheless, as reported by the media, the largest telco firm endured a 60% plunge in net income to Php 10.74 billion in 2022. (Figure 1, higher pane)
And because the firm disclosed that its 9-month earnings reached Php 27.632 billion, this extrapolates to Php 16.9 billion loss in Q4!
As it turns out, Q4 2022 was pivotal to the annual activities of PLDT. It could mark a turning point in their operations.
It altered the "growth" momentum—a theme left out by the consensus.
Naturally, the firm and the media looked for a silver lining in their 2022 annual report.
So they brandished PLDT’s revenue performance. Indeed, peso revenues reached their highest level ever. (Figure 1, lower chart)
However, the growth rate appears to have peaked and has been slowing since 2020.
Of course, there is a story behind it.
The industry benefited immensely from the stay-at-home or 'gulag' policies imposed by authorities in response to the pandemic. The policy forced a shift in demand from the office to the households, which generated its "growth" at the expense of other industries.
Though authorities allowed the "normalization" of economic activities since 2021, the firm reported a brisk demand from households via broadband and data services (think Tiktok) in 2022.
Industry sales also flourished from the historic liquidity injections by the BSP and the banking system. Bank-fueled credit expansion in 2H 2021 throughout 2022 also contributed to this transition. Hence, excess liquidity and the "reopening" delivered the topline for PLDT (and other telco firms).
The thing is, a spike in the 2022 total cost prompted profit margins to collapse, consequently, net income plummeted.
Figure 2
The firm seems to have charged its "budget overrun" through depreciation and amortization expenses, which jumped by 89% to a record Php 98.7 billion from Php 52.2 billion a year ago. Meanwhile, total cost surged by 38.2% in 2022. (Figure 2 upper chart)
The growth rate of this expense category, ironically, started to pick up in 2019, when the "budget overrun" affair supposedly began. Coincidence, perhaps?
The Q4 2022 Pivot: Revelation of the Budget Overrun and the BSP Rate Hikes
Q4 data exhibits the "pivot" in action. Powered by the 306% YoY growth surge in depreciation and amortization expenses, Total Cost growth spiked by an eye-popping 86.8% to Php 73.8 billion! Gross margins turned negative (-41%) as a result. (Figure 2, lowest chart)
But there is more.
The widespread perception is that income has led been the growth center of the company. Yet through the years, debt has outgrown income.
In 2022, PLDT’s total debt deflated by a scant 1.18% to Php 249.6 billion from Php 252.6 billion in 2021. (Figure 3, topmost chart)
Despite this contraction, financing costs soared to Php 11.77 billion, an All-Time high! Financing costs accounted for 5.7% of revenues, also a record. (Figure 3 second to the highest pane)
By quarter, PLDT's debt levels surged to a milestone of Php 282.2 billion in Q2 2022 but dropped to Php 249.6 in Q4 2022. Such uncharted debt levels prompted financing costs to jump by 14.8% YoY in Q3, exacerbated by a further 16.9% spike in Q4 2022. (Figure 3 second to the lowest chart)
The BSP commenced its interest rate hike campaign in May 2022. Thus, rising rates have also been instrumental in pushing up their financing costs in the 2H of 2022. (Figure 3, lowest chart)
Figure 4
Further, the dwindling cash reserve—since 2018—extrapolates to diminishing liquidity, which means increased challenges for PLDT in servicing its liabilities. (Figure 4, upper diagram)
In the end, the toxic mix of elevated debt load and rising rates compounded their "budget overrun" dilemma that eroded whatever benefits from the subsidies the BSP has provided.
Once rising rates hit the consumers and the economy, it should bite on PLDT's tenuous position, given that their sales growth rate has already been headed south after reaching its acme in Q2 2021. (Figure 4, lower chart)
Or with the smoothing out of the distortions from the pandemic economy to the reopening, PLDT's topline has been dependent on credit expansion, which rising rates could overturn.
The excess budget controversy, as I previously wrote,
It likely represents a pivotal sign of reversal from the era of speculative mania, financial excesses, operational and legal complacency, and market overconfidence.
Instead of a renascence, it signifies a persistent deterioration of the financial system and the economy.
___
Reference
Prudent Investor, PLDT’s "Budget Overrun" Issue in the Eyes of Historian Charles Kindleberger, December 27, 2022; substack, blogger
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