MANILA, February 28, 2006
 (STAR) By Des Ferriols - Financial markets recovered yesterday on optimism President Arroyo will proceed with plans to improve the country’s finances after avoiding an escalation in protests seeking to topple her government. Analysts said investors largely brushed aside President Arroyo’s declaration of a national emergency which is likely to remain in place after a tense military standoff at the weekend.

"As long as the political environment in the Philippines continues to stabilize then the current threat to the leadership should diminish and the currency can drift back to stronger levels," said Sean Callow, a currency strategist at Westpac Banking Corp. in Singapore. "It’s going to need fresh negative news to take the peso lower."

The peso opened weak at 52.30 to a dollar but recovered a the end of the trading session to close 24 centavos higher at 51.96 from Friday’s close of 52.20 to $1. The peso recorded its biggest decline since July 2002 on Feb. 24 as the President declared a state of emergency amid a military plot against her. Trading volume was heavy at $628.10 million on an average rate of 52.088 to the dollar.

At the Philippine Stock Exchange (PSE), the composite index gained 19.43 points to settle at the day’s high of 2,089.36 after hitting a low of 2,058.36. The broader all shares index gained 7.85 points to 1,012.01.

"It appears that the incident that occured over the weekend didn’t shake and stir the market," Nestor Aguila of DA Market Securities said. "People may be getting sick of all these changes in leadership," said Dilip Parameswaran, Hong Kong based head of Asian Credit research at Calyon, the securities arm of Credit Agricole SA. Friday’s fall represented a buying opportunity, he said, because "President Arroyo seems in control. The military is still with her." While the Bangko Sentral ng Pilipinas (BSP) would not disclose its participation in yesterday’s trading, traders said the market was wary enough anyway, that the central bank would step in aggressively to prop up the peso.

Although the BSP’s official mandate is only to smoothen the volatility of the exchange rates, traders said the central bank had enough ammunition to step in anytime and step in strongly. "It appears that the underlying sentiment continues to be positive for the peso despite the events in the last few days. Today (yesterday), the peso was supported by portfolio inflows, exporter dollar sales and OFW remittances," BSP Governor Amando Tetangco Jr said. In its last balance of payment report, the BSP said the country’s international reserves stood at an all-time high of $20.504 billion as of January, due mostly to the $2.1-billion borrowing made by the Arroyo administration.

As a result, the balance of payments (BOP) hit strong surplus levels of $1.925 billion in January, up from a deficit of $277 million in 2004. This meant that the BSP had enough dollars to dampen what it considered excessive pressure on the peso as it tries to "smoothen volatility". As a matter of policy, the BSP never openly owns up to its market operations but Tetangco said the central bank was responsible for keeping volatility rates low and "ensuring that changes in exchange rates happen in an orderly fashion." Traders agreed with the BSP that considering Sunday’s events, yesterday’s turn-out was still within "normal parameters" and the market is likely to remain on the defensive until things normalize.

PLDT’s strong performance

The stock market recovered yesterday as strong results from the Philippine Long Distance Telephone Co. (PLDT) offset damage from continuing political tension.

PLDT posts record net income of P34B in 2005 By Mary Ann Ll. Reyes The Philippine Star 02/28/2006

Telecommunications giant Philippine Long Distance Telephone Co. (PLDT) posted a record net profit of P34 billion last year, up 22 percent from the P28 billion net income generated in 2004. The earnings, ahead of analysts’ forecasts, benefitted from "foreign exchange transaction gains and certain deferred tax assets," the company said in a statement. Analysts were expecting full-year net profit to come in between P30.73 billion and P32.4 billion. Consolidated service revenues rose five percent to P121 billion. Revenues from the company’s wireless services were up eight percent over 2004 to P74.7 billion with the PLDT group’s total cellular subscriber base growing by 1.2 million to 20.4 million.

Meanwhile, fixed line revenues rose 2.47 percent to $49.7 billion, compared with the previous year. Increases in data revenues offset the downturn in local exchange and international and national long distance calls, PLDT said. It added that net income before gains from foreign exchange and derivative transactions stood at P31.3 billion, an increase of nine percent from the previous year’s income of P28.7 billion. This, the company said, was largely due to wireless subsidiary Smart Communication’s strong performance and recognition of certain deferred tax assets. Expecting a more challenging operating environment this year, PLDT chairman Manuel V. Pangilinan said they are taking a prudent view of their financial prospects this year.

"Growth in core earnings will be benign as revenue growth moderates. Cash flows will remain robust despite higher capital expenditures. We will still aim to increase shareholder returns by raising dividends to at least 50 percent of 2006 earnings and continue strengthening our balance sheet by reducing debts by at least another $300 million. In effect, we anticipate 2006 to be a year of transition as we lay the groundwork for future growth before reaping the benefits in 2007 and onwards," Pangilinan pointed out. He said pre-tax earnings could grow double digit compared to 2005. "Operating expense will grow but not double-digit and, looking at our projected profit and loss this year, revenue will grow more than the growth in expenses. PLDT expects tax payments this year to more than double to P9.7 billion compared to last year’s P4.2 billion.

Pangalinan added that he expects future growth to come from "extracting more juice" from the current mobile phone technology in use by developing content and new products to increase usage, broadening market presence in the lower-income market for cellular, optimizing fixed line through new products and price plans to increase the number of subscribers, expanding the fixed line and DSL network facilities, rapidly building out wireless broadband network to cover a major part of the national market, providing more affordable broadband pricing plans, increasing PC/laptop penetration through promotional offers, expanding Internet cafes to increase broadband reach, and increasing availability of content to Internet and mobile subscribers. "Our job is to plant trendrils for growth that could vegetate into something substantial. This will be a year for things to slow down and for our people to pause after years of messing around and producing spectacular growths. We want to see better growth but it is difficult to be specific,"Pangilinan said.

PLDT is investing $150 over the next three years in the third generation (3G) mobile communications technology. Capital expenditure this year until 2008 is seen increasing to P18 billion per year, half of which will be for the mobile phone business and half for the fixed line business. Net debt is likewise projected to drop to $1.3 billion and net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) to less than one times by yearend, both historic lows, Pangilinan added. Starting 2007, Pangalinan said he expects PLDT to be back on track in terms of earnings momentum with a double-digit growth in earnings projected beginning next year.

PLDT president and chief executive officer Napoleon Nazareno noted that the group’s consolidated balance sheet continued to strengthen with debt balance down to $2.1 billion. The Group reduced debts by $713 million, ahead of the $500-million target set at the beginning of the year. Debt to EBITDA and debt to free cash flow ratios improved to 1.4 times and 2.2 times, respectively while consolidated free cash flow surged 37 percent to P51.2 billion in 2005 from P37.3 billion in 2004. Approximately 80 percent of cash flows were utilized to pay down debt with the balance being used to pay out cash dividends. The PLDT board declared yesterday a final dividend of P28 per share. Added to the previously paid interim dividends of P42 per share, total dividends for the year amounted to P70 per share, representing a payout of slightly over 40 percent of 2005 core earnings.

Meanwhile, Smart’s core income increased 23 percent to P31.3 billion while other cellular unit Piltel also reported a record net income of P13.5 billion compared to P9.8 billion in 2004. Net income adjusted for foreign exchange revaluation and changes in management agreements (sharing of profits with Smart for use of latter’s network) stood at P11.6 billion as against P6.7 billion in 2004. Consolidated wireless EBITDA improved by 13 percent to P49.5 billion in 2005 from P43.8 billion in 2004 while EBITDA margins improved to 66 percent. Smart accounted for about 59 percent of industry revenues in 2005 from 58 percent in the previous year. Total cellular subscriber base for the year grew by 1.2 million to 20.4 million, a 59-percent market share. According to Nazareno, the effect of the termination of SIM-swapping activities in May 2005 manifested itself in the third and fourth quarters as the PLDT Group reported net disconnections of approximately 380,000 subscribers for the period compared to net activations of 1.6 million in the first half of 2005.

Capital expenditures for the wireless business were P8.8 billion for 2005, increasing to P9 billion this year which will be spent largely for 3G rollout and expansion of wireless broadband. "The continued pressure on disposable income with the implementation of EVAT (expanded value-added tax) will pose a challenge to top-line growth but we have a number of services in the pipeline which will make telecommunications even more affordable and accessible to Filipinos,"Nazareno added. Nazareno also reported that fixed line service revenues improved two percent to P49.7 billion due to a significant increase in data revenues which more than offset declines in local exchange and long-distance call revenues. Dollar-linked revenues arising from the local exchange and international long-distance businesses were negatively impacted by the appreciation of the peso.

Retail DSL (digital subscriber line) continued its strong growth as broadband subscribers reached close to 90,000 with another 380,000 subscribers using PLDT’s Vibe dial-up Internet service. DSL-capable lines are expected to reach 300,000 by end-2006 even as the international bandwidth capacity is seen increasing from five gigabits per second to 20 gbps this year to accommodate increased Internet usage.

Nazareno projects these subscriber numbers to double this year, with fixed line capex rising from P5.5 billion last year to P9 billion this year as PLDT accelerates its transition from its legacy network to an Internet protocol-based next generation network. The upgrade is expected to take place over a three-year period. "We enter into this new investment phase with renewed confidence as the company is on a sound financial footing and well ahead of our targets in terms of debt reduction, dividend payments to shareholders and financial ratios,"the PLDT CEO noted.

For his part, Pangilinan emphasized that after several years of significant expansion, the company’s businesses are approaching a ‘tipping point’ as it embraces new technologies that could provide exciting opportunities for growth. "We are committed to optimizing technologies by investing in a next generation network, broadband and 3G while maximizing our current networks. Seen in the context of the future, our strong financial results are in fact critical in underpinning the next round of significant investments required for the next generation infrastructure," Pangilinan stressed.

Chief News Editor: Sol Jose Vanzi

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