The service will automatically be included in the tariff plans for Manx Telecom customers who are on a 'pay monthly' smartphone plan and with a 4G ready handset. Currently two fifths of smartphones owned by Manx Telecom customers are 4G ready and the company is offering a trade-in scheme for any customers who want to upgrade to a 4G ready smartphone or tablet. The new 4G network will enable customers to experience speeds up to seven times faster than on the company's 3G network, so a 4G customer will be able to download a song, game or an app in a few seconds rather than the normal two to three minutes it takes on 3G. The new network also has the added benefit of providing better 2G and 3G mobile coverage on the Isle of Man too.
Achieving 95 per cent coverage on the Island means that the Isle of Man will be substantially ahead of 4G availability in the UK, which is at best available to 70 per cent of the population. In addition, this level of coverage is substantially ahead of its 4G licence commitment, whereby Manx Telecom has committed to achieving a minimum of 33 per cent coverage at launch and 95 per cent two years after launch.
Leveraging off new technologies
This latest development highlights the revenue opportunities being pursued by the company. Primarily, Manx Telecom is targeting growth in the high value post-paid customer base and by leveraging off the mobile launch of a 4G network to boost mobile data traffic. These are key segments because in terms of revenue split, fixed-line services account for 40 per cent of Manx Telecom’s annual turnover of £76m, the mobile segment contributes around 25 per cent, data centres just under 9 per cent, and the off-island business around 18 per cent.
It also means that fixed line services are becoming a smaller part of the overall business in favour of higher margin revenue streams. Off-Island primarily relates to the mobile technology platform, enabling wholesale and corporate customers to offer a variety of mobile products using Manx Telecom SIMs. This segment posted 26 per cent growth in 2013 buoyed by an accelerated development of the product range including technologies that allow both wireless and wired systems to communicate with other devices. Examples here include vehicle tracking, alarms and metering.
Data centres are likely to be another significant revenue generator for Manx Telecom in the years ahead as the company moves into the small and medium enterprises (SME) market with the provision of Cloud services. The provision of additional data centre facilities later this year should underpin growth as the company targets high value managed service contracts and aims to be the Island's leading, quality data centre operation. To this end, Manx Telecom’s new data centre opened at the end of March and added 100 racks of storage space to take the total storage space to 385 racks.
In other words, within a few years I would expect fixed line services to account for nearer to a third of the company’s total revenues. And the combination of a strong market position delivering high quality services into a growing and resilient market place should also underpin Manx Telecom’s profits too. It’s worth pointing out that unlike its UK-listed rivals, the company benefits from a zero per cent corporate tax rate (applies to the vast majority of Manx Telecom's businesses) which means it pays no corporation tax on both on and off-Island profits.
Bumper cash returns for shareholders
That should ensure more cash is returned to shareholders through dividends, a key attraction to me when I recommended buying the shares at 164p a couple of months ago (‘High yield telecoms play’, 15 May 2014). Manx Telecom’s board intend to declare a dividend of 10p a share in the current financial year and one that will cost £11m to fund, a sum easily covered by annual free cash flow of £16m. As one would expect from a telecoms company, cash generation is pretty robust with cash inflow from operations just over £28m last year, or 103 per cent of cash profits of £27.4m.
So, offering a 5.8 per cent prospective dividend yield, and with its enterprise value (market capitalisation plus net borrowings) less than 10 times annual cash profits, the company’s equity is attractively priced in my view. Even at my target price of 210p, an enterprise value of £300m only equates to 11 times cash profits and the dividend yield is still attractive at around 4.8 per cent.
Needless to say, I continue to rate Manx Telecom shares a buy on a bid-offer spread of 170p to 172p ahead of the forthcoming interim results on 25 September. Buy.
■ Simon Thompson's new 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 stock-picking'
