BULL POINTS:
■ Recent strength of US dollar
■ Growth from Monaco/Macau operations
BEAR POINTS:
■ Caribbean operations in a horrible state
■ Borrowings too high
■ High capital spending needs
■ Dividend cut looks likely
It's all very well buying a company's shares for the income, as long as the company can afford to keep paying, and hopefully growing, the dividend. But the investment case goes belly up if can't, and investors in Cable & Wireless Communications (C&WC) are increasingly facing just such a future.
Demerged from Cable & Wireless at the end of March, C&WC supplies a rag-tag collection of fixed-line, mobile and broadband services across the globe, from Monaco to Macau, the Caribbean to Central America, but business is in decline.
| IC TIP RATING: | |
|---|---|
| Risk rating: | High |
| Timescale: | Short-term |
| What do these mean? Find out in our | |
The Caribbean is the biggest single market, worth 37 per cent of income, but it remains in a right old state thanks to slumping tourist numbers. Revenues fell 10 per cent to $873m (£598m) in the year to 31 March, while a similar slump in profit margins led cash profits to plunge 20 per cent to $270m (£185m). Panama, worth a quarter of group income, isn't doing much better. It posted a 5 per cent revenue decline, including a worrying reverse in mobile revenues. These fell 1.3 per cent in the second half compared with 14 per cent growth posted just a year ago – some slowdown.
Revenue did rise in Monaco and Macau, up 9 per cent and 5 per cent respectively, but this failed to prevent a group-wide decline of 4 per cent. Meanwhile, underlying revenue, after stripping out acquisitions, was even worse – it fell 8 per cent year on year.
Without a Caribbean recovery, things look set to get worse. And, given that the region faces its worst economic crisis in a generation, and that C&WC is exposed to local government contracts, this appears only too likely.
| ORD PRICE: | 60p | MARKET VALUE: | £1.58bn | |
| TOUCH: | 60-60.5p | 12M HIGH / LOW: | 66p | 53p |
| DIVIDEND YIELD: | 9.3% | PE RATIO: | 20 | |
| NET ASSET VALUE: | 10p | NET DEBT: | 77% | |
| Year to 31 Mar | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 2.45 | 394 | 6.4 | Na |
| 2010 | 2.35 | 383 | 4.9 | 3.34 |
| 2011* | 2.32 | 381 | 4.70 | 5.60 |
| % change | -1 | -1 | -4 | +68 |
NMS:30,000 MATCHED BARGAIN TRADING BETA: 0.7 *Evolution forecasts £1 = $1.59 | ||||
More share tips and updates...
According to broker Evolution, 84 per cent of group revenue is pegged to the US dollar. The group reports in dollars, so the greenback's recent strength won't make much difference to profits. However, C&WC pays its dividend in sterling so the dollar's strength is good news and explains the recent stability in the share price. But the dollar peg will be of limited use if the fundamentals in C&WC's two biggest markets remain weak. Worse, the dollar's strength might reverse.
Complicating matters is £238m-worth of bonds, which will need refinancing by 2012. The worry is that bond investors won't rush to buy new bonds while the company is paying a dividend to ordinary shareholders that, almost certainly, will not be covered by earnings.
Adding pressure to already-squeezed cash flow are rising capital spending, hefty interest charges, pension payments and possible tax hikes. Most recent management guidance has been for $350m of cap-ex this year and a tax rate approaching 30 per cent, a good deal higher than previous Evolution estimates of $305m and 23 per cent.
True, our sell recommendation is a change of tack since we last wrote about C&WC's shares (), but the background has changed big time. The Caribbean remains as bad as ever – in the first quarter of 2010-11 average revenue per user continued to decline. And sentiment among City analysts may be close to turning. Broker Evolution Securities recommends selling the shares and investment bank Merrill Lynch questions whether the dividend is sustainable.
