C&WJ — Page 26

CWJ: Making headway but slowly

Buying market share can be a costly and take years. Cable & Wireless (C&W) has found this this out the hard way. Once the only telecom operator in the Jamaican market, they have seen their dominance fade sharply to Digicel, the relatively new comer to the scene and it has spent hundreds of millions of dollars trying to win back market share.

Once highly profitable, C&W has suffered years of losses as they changed one CEO after another in search of the one that could stabilize and then grow the business. So far investors have not seen any returns for the patience. The early months of the last fiscal year looked as if it could be the turning point as the company aggressively went after new customers with a bold move of slashing mobile rates from $9 on prepaid calls to $2.99 per minute, just ahead of the Office of Utilities Regulation (OUR) forcing a cut of interconnection rates from $12 per minute to $5. At the end of the fiscal year to March, the company reported some success in boosting mobile revenues by 14 percent and mobile customers by 16 percent, but still reported a $5 billion loss, inclusive of redundancy payment to staff flowing from outsourcing of the maintenance area of its business as a part of a cost cutting strategy.

In the quarterly report for June this year, C&W reports continued growth in the mobile business but not for landline where it suffers from contraction, some of it, due to customers opting for mobile alone now that the rates are low.

C&W fight is on two fronts, one is cost cutting and the other is raising revenues. So far they seem to be making headways on both, albeit not fast enough. Revenues are down for the 2013 fiscal year partly as a result of reduction input payments for call termination which fell by $1.5 billion while revenues fell by $1.3 billion. The company also absorbed the additional telephone tax until March this year, estimated by IC Insider at approximately half a billion dollars.

June quarter | According to the company, active mobile subscribers are up 22 percent in the latest quarter and mobile revenues by 10 percent compared with June 2012 quarter. This revenue growth is remarkable when considered against the back drop of rates that were much higher for two months of the 2012 period and with last year’s June report showing a 21 percent jump in revenues. While growth in number of active subscribers is important as it will grow revenues, boosting the profit margin can be just as effective and may even be less costly. Here C&W is hoping that the reduction in termination rates will see most of its customers spending around the same as before thus boosting net income. The numbers from profit results since last year suggest that is happening, excluding land lines, but that could well be people using cellular as the cost differential is not all that great any more.

Legacy carriers | To be fair to C&W, legacy carriers worldwide have suffered severely from competition as the market has changed dramatically. Not only is mobile big, but the Internet has had a major impact on cross border communication, robbing telecom companies of high profit margin revenues.

The company’s focus on increased subscribers contributed to a 60 percent rise in acquisition cost for free hand sets. It’s costly but seems to be delivering results in growing the mobile business, which it badly needs since the land line business is mature.

Quarterly numbers | In spite of the much touted progress made in the mobile segment, results for the first fiscal quarter have not shown much of the benefits. Revenues are down from $4.8 billion to $4.35 billion some of which is due to the interconnection rate reduction as well as a cut in rates for prepaid customers ahead of the official start of the new termination rate from $5 to $1.10.

Cost is up in some areas and the company speaks of a 25 percent jump in material spend to continuously improve the network. What is known is that administrative cost is up sharply both for the quarter as well as for the fiscal year which ended in March. The cost in this area is up to $1.77 billion from $1.5 billion in the last year June quarter and $5.8 billion for the full year. Labour cost is down due to reduction in staffing mid-way in the June quarter, so there is more to come for this item. The sudden jump in administrative and cost suggest that it is not permanent. In support of this, a look at the cash flow indicates what is happening. Two items amounting to $715 million accounted for the bulk of the increase, but these will not be ongoing; a $200 million in writing down a long term loan for loss on exchange and $515 million in provisioning for site restoration due to hurricane damage.

C&W reported a loss of $827 million in the June quarter, a big increase over the $430 million lost in 2012. For revenues alone to wipe this out would require a net 20 percent increase but a combination of a revenue increase and cost reduction could do the trick. Much is hinging on the reduced termination rates to pump more of the revenues to the bottom-line. The September quarter may be very revealing in pointing the way forward.

Of course, the C&W balance sheet is not looking pretty with negative equity of $20.5 billion and loans of $32 billion due to group companies and third parties. Current liabilities is at $10 billion while current assets are at $7.5 billion — not the kind of ratio that one would want to see under normal circumstances. But then, this is not your normal company.

D&G or C&WJ: to buy or not?

Hi John: Should I buy more Lime stock or D&G? I already own some Lime shares. What was the last dividend paid by D&G? Thanks for your advice.

Response | That is a tough question. By the way there is no such company as Lime. Unfortunately the stock exchange has, in their wisdom, bastardized the system by trying to suggest that Cable & Wireless has had a name change but that is not so. There is no legal limited liability company such as Lime listed on the exchange. Lime is purely a brand name and not the real company name. It seems to me that the exchange is totally confused. They have the name Lime for the company with the ordinary shares but they did not change the name of the preference shares which are still listed as Cable & Wireless. Drawing a line from what they have done, anyone not knowing the true situation would assume that there are two separate telecom companies listed, one called Lime and one called Cable & Wireless. Why JSE persists with this aberration is yet to be determined as there is no rationale for it, but then the stock exchange is doing many strange things these days. It makes one wonder if they are really serious about running a stock exchange at all.

D&G | Now to the question you asked. My investment company owns shares in both Cable & Wireless and D&G. First, the last dividend paid by D&G was 20 cents in December last year and another should be paid in June or July this year. They normally pay out 80% of profits each year so the next dividend could be around 40 cents since we project about 80-85 cents earnings per share for the current year to June.

D&G’s quarterly results are expected next week and they should have enough momentum to surprise the market and push the stock price up. I really like it as they have cut a lot of costs out of the operation with the switch of production of Red Stripe to the USA. The local market seems to be holding up well based on the last set of results released. We see further demand in the next fiscal year that should continue to move the stock price higher.

C&WJ | We still like and have great hopes for Cable & Wireless. If fact, we love turnaround companies because if we get it right and time the entry into the stock, we will make above average returns. They have been cutting costs and revenues should start rising from the new pricing strategy adopted for cell calls last year. These moves allowed them to pull in more than 250,000 new users. The revenue from those phones should be earned for the full 12 months this fiscal year instead of only part year as was the case for the 2013 fiscal. The calculations we’ve made indicate strong profits this year from increased revenues and reduced costs, the latter based on cost cutting as well as improved margins resulting from re-pricing when the interconnection rate were lowered last year.

Our main concern in the short term is the redundancy charge that we estimate to be around $3 billion that could cause the market to react negatively when the final 2013 numbers are released in a few weeks’ time. That doesn’t really bother us, as that reaction in our estimation, will be short-lived as investors start to see major improvement in the operating results starting in the June quarter. One may want to hedge one’s bet, by buying more now but leave room to pick up some at lower prices should the market react negatively to the impact of the redundancy cost that will depress the results but won’t repeat in the new year. Not only will it not repeat, there should be cost savings from the move that will help boost profits. Either way, it’s a bit of a gamble but the price is so low now and the upside potential so great in our estimation, that there is less risk in buying now than to await the results.