This benign economic back drop is very good news for Manx Telecom (MANX:215p), the incumbent telecoms operator on the Isle of Mann. It's also good news if you followed my recommendation to buy the shares when the company listed on the Alternative Investment Market (Aim) (‘High yield telecoms play’, 15 May 2014). The holding has produced a total return of 40 per cent in the past 22 months, during which time the benchmark FTSE Aim index has fallen by 11 per cent. There are sound reasons to believe this relative outperformance will continue.
Income play with capital upside
Firstly, in a low interest rate and low growth environment, Manx Telecom is an attractive investment proposition for income seekers with the chance of decent capital upside too. Since I initiated coverage the company has paid out total dividends of 13.4p a share and this excludes the raised final dividend of 6.9p a share declared yesterday which will be paid on 24 June (ex-dividend date of 26 May). So not only is there a decent historic dividend yield of 4.8 per cent to lock into, but there is ample scope for the progressive dividend policy to continue.
That's because last year's annual cash profits of £27.7m easily covered the £2.5m finance charge on the company's net debt of £52.2m, and £7.9m-worth of capital investment in its telecoms businesses and data centres, to leave Manx Telecom with £15.6m of free cash flow, a sum that covered the cash cost of the £11m dividend about 1.4 times over. In fact, since floating on Aim a couple of years ago, the company has reduced borrowings by £13m through internal cash generation and at the same time paid out total cash dividends of almost £15m. Net borrowings are now less than two times cash profits, a modest 57 per cent of shareholders funds of £91m, and well within a credit facility of £80m that has been extended to June 2020, so the balance sheet is hardly stretched either.
It's worth flagging up too that Manx Telecom has a non-cash £9m depreciation and amortisation charge. This subdues the pre-tax profit line, but not cash generation. And it’s this impressive cash generative capacity of the business that enables Manx Telecom's board to invest in new areas to diversify revenue streams as well as maintaining its unique position as the only operator of a fixed-line copper network providing local access on the Island, serving almost all of the existing available residential and business customers for fixed line, and providing a substantial proportion of the Island's existing available customers with broadband and mobile services.
Diversifying revenue streams
For instance, data centres are now a significant revenue generator for Manx Telecom. The company's Greenhill data centre opened in March 2014 at a cost of £3.5m to add to capacity offered by its existing facilities in Douglas North and Douglas Central. Greenhill added 100 racks of storage space to take the total storage space to 385 racks. Phase two of that project completed last year at a cost of £1.5m and added a further 120 racks. The Greenhill centre is now 50 per cent full and rising as Manx focuses on recruiting additional co-location and managed service clients. Revenues from this division rose by 20 per cent to almost £8m last year to account for 10 per cent of the total.
The company has sensibly exploited its strong market position ahead of opening up its fixed network to competitors by offering a wholesale fixed line product to them. It has rolled out high speed VDSL broadband services (up to 40 megabits per second (Mbps) download) across the Island to reach 91 per cent of households with a 30 per cent penetration rate, and launched superfast broadband which delivers download speeds of up to 80Mbps and upload speeds of 10Mbps. The sale of these new products helped broadband revenues to increase by 4.3 per cent to £8.7m last year and this segment now accounts for more than a quarter of revenues generated from fixed, broadband and data services.
Manx Telecom has also been targeting its mobile offering and with a fair degree of success as revenues here rose by almost 10 per cent to £20m last year, driven by revenue gains from inbound roaming and post paid contracts. The operator's 4G network now provides virtually all the population with coverage at speeds of up to 10 times faster than 3G services, and is available to both contract and pay as you go customers who have a 4G compatible handset. Having launched 4G services in 2014, the mobile network now has 34,500 pre-paid customers and over 30,000 monthly contract customers. The introduction of 4G and general up-selling of data packages contributed to modest increases in average revenue per user for both packages.
The bottom line
The bottom line is that Manx Telecom's underlying pre-tax profits rose sharply last year, up by 28 per cent to £16.6m to deliver a 20 per cent rise in EPS to 14.65p, a performance that enabled the board to hike the full-year dividend by 5 per cent to 10.4p a share. This means that the shares are rated on just shy of 15 times' earnings and offer an attractive dividend yield of 4.8 per cent. That's a reasonable valuation as is an enterprise value (market capitalisation plus net debt) to cash profit ratio of 11 times.
So, with analysts forecasting another year of growth - Liberum Capital predict cash profits will edge up to £28m and the payout raised by 5 per cent to 10.9p a share, implying a prospective dividend yield of 5.3 per cent; and the technical set-up positive, I would recommend running your 40 per cent paper gains as I can foresee the shares taking out their all-time closing high of 217p. Liberum raise their target price by 10 per cent to 238p yesterday. Please note that I last advised running profits at 208p in the autumn after they hit my previous target price of 210p ('Five shares that keep on delivering', 3 November 2015), since when the company has paid out an interim dividend of 3.5p and the shares have risen by 4 per cent during which time the FTSE Aim index has fallen by 4.5 per cent. Run profits.
I have published two columns today and 26 in total since mid-March, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 Mar 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 Mar 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 Mar 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 Mar 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 Mar 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 Mar 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 Mar 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 Mar 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 Mar 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 Mar 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 Mar 2016)
■ Miton: Buy at 30.5p, new target 38p ('Riding earnings upgrades', 22 Mar 2016)
■ Inland: Run profits at 86p, new target 95p ('Valuation surge boosts Inland', 22 Mar 2016)
■ Pittards: Crystallise loss at 71p ('Subdued demand hits Pittards', 22 Mar 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 Mar 2016)
■ Safestyle: Run profits at 276p ('Exploiting a window of opportunity', 23 Mar 2016)
■ PV Crystalox: Speculative buy at 10p ('Lights start to glow at PV Crystalox', 23 Mar 2016)
■ Arbuthnot Banking Group: Buy at 1340p ('Banking on a banking duo',23 Mar 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 Mar 2016)
■ Burford Capital: Run profits at 256p ('Legal eagle flying high', 24 Mar 2016)
■ 1pm: Buy at 62p, target 82p ('1pm's smart bolt-on buy', 24 Mar 2016)
■ Bilby: Buy at 128p, target 175p; AB Dynamics: Run profits at 390p ('British success stories', 29 March 2016)
■ IS Solutions: Run profits at 157p, new target price 175p ('Big data, big rating', 30 March 2016)
■ GLI Finance: Recovery buy at 32.5p, initial target 40.75p ('High yielding recovery buy', 30 March 2016)
■ Bowleven: Buy at 21.5p (‘Investors overreact to Bowleven’s write-downs’, 31 March 2016)
■ Manx Telecom: Run profits at 215p (‘A jewel in the Irish Sea’, 31 March 2016)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
