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OPINION

A high-yield jewel in the Irish Sea

A high-yield jewel in the Irish Sea
October 29, 2014
A high-yield jewel in the Irish Sea
IC TIP: Buy at 180p

That's something that Isle of Man's telecom company Manx Telecom (MANX:180p) has been exploiting. The business operates in a relatively affluent, local market, servicing a population of 85,000. In the last 10 years alone, the island has posted average annual growth in GDP of 6 per cent and has recorded economic growth for the best part of three decades.

So given the favourable demographic, and one that has benefited from relatively affluent times compared with the more volatile UK economy, Manx has been upping its game in recent years to tap into this user base. For instance, in the summer the company launched its 4G mobile network and one that covers 95 per cent of the island's population. It's proving popular with data speeds seven times quicker than the old 3G network. Moreover, Manx had first mover advantage as its nearest competitor has yet to enter the market. So by offering a trade-in scheme for customers upgrading their smartphones or tablets the company has been able to grab market share.

Another smart move is a new VDSL Plus service, announced this week and scheduled to launch in February 2015. This will use a new frequency on Manx Telecom's existing fibre optic network to deliver the fastest fixed line broadband on the Island with speeds of up to 80 Megabits per second (Mbps) download and up to 10Mbps upload. It's timely too given the increasing popularity of households using multiple devices such as smartphones, tablets, laptops and internet-enabled TVs. This is creating an ever increasing demand for higher broadband speeds for home entertainment.

The improved upload speeds of VDSL Plus will undoubtedly prove attractive to businesses too and underpin the Island's growing status as a place to live and do business. Around 50 per cent of all homes and businesses on the Isle of Man will have access to VDSL Plus from launch due to Manx Telecom's early investment in fibre optic cabling to street cabinets and basements. This has brought in more homes and businesses to within the critical 1,000 metre distance (needed for ultra fast broadband speeds) from the company's serving equipment.

 

Sound finances

Importantly, these new initiatives are complementary to a business that is already performing well. In the first half to end June 2014, Manx Telecom's operating profit rose 14 per cent from £8.5m to £9.7m on a 4 per cent rise in turnover to £39.3m. True, a lower depreciation charge accounted for £700,000 of the profit increase, but costs are being kept in check and the increase in the cost base lagged revenue growth.

Operating cashflow was up 6 per cent to £11.2m which enabled the company to complete its phase one investment in a new data centre (capital investment of £1.5m booked in the period) and the 4G roll-out (investment of £10m split over 2013 to 2015), and still generate free cashflow of £5.2m.

In turn, this cash generation is supporting the board's commitment to pay a 9.9p dividend for the 2014 fiscal year. The 3.3p a share interim will be paid on 10 November and expect a final dividend of 6.6p a share to be declared next March. On this basis, the shares offer a prospective yield of 5.5 per cent. The £12m cost of that annual payout is covered more than twice over by Manx Telecom's cash profits, so looks secure even after factoring in future capital expenditure and interest payments on group net borrowings of £58m. The terms of the credit facility are interbank offer rate plus a margin ranging from 2 to 3.5 per cent based on Manx Telecom's ratio of total net debt to cash profits. At the end of the first half net debt was just over two times cash profits, a comfortable level.

So with finances in good health, and the company growing profits and rewarding shareholders with chunky dividends, it's hardly surprising that Manx Telecom shares have performed well since listing at the start of this year. In fact, they have risen almost 10 per cent since I initiated coverage when the price was 164p ('High yield telecoms play', 15 May 2014), during which time the FTSE Aim index has slumped 12 per cent. I last updated my view when the price was 172p ('Dial into a high yield play', 17 July 2014).

There may be a paucity of analyst coverage on the company, but this jewel in the Irish Sea continues to dial all the right numbers and I maintain my 210p target price. Buy.

Please note that I have written 22 other columns in the past fortnight including two today, all of which are available on my IC homepage...

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'