Having exposure to the rapidly expanding internet looks more and more like a no-brainer. Enter C&W Worldwide, an international provider of critical communication, web and data services.
Its client list includes Tesco, National Grid, and Ryanair (54% of sales) and firms in Asia, the Middle East, Europe and America. Its shares began trading as a separately listed entity last Friday, after its successful demerger from C&W Communications (CWC).
The firm should appeal to prudent investors seeking a combination of income, capital appreciation and downside resilience. The board has a good track record, having restructured the business and increased its share of the £7bn UK corporate telecoms market from 13% in 2005 to 19% today. It now ranks as the number-two player behind BT and aims to reach 25% as customers continue to opt for its first-class products. It recently won a £1m-a-year contract with HMV – ousting BT Global Services in the process – to create a digital network across its 600 outlets.
Tough times are proving a boon for the company’s high-speed voice, data and hosting services (67% of sales). The slump has accelerated the trend to outsource in-house operations. And larger suppliers, such as this one, are faring better than their smaller brethren as customers insist on greater levels of network resilience and disaster recovery protection.
C&W Worldwide (LSE: CW.), rated a BUY by Deutsche Bank
Aside from benefiting from the popularity of bandwidth-hungry applications, such as video conferencing, and e-commerce, C&W Worldwide is enjoying exponential growth in Asia. At last month’s roadshows, CEO Jim Marsh explained how orders in the region rose a whopping 60% in the three months to December and that India is now its most important overseas market. Moreover, with a huge geographical reach in broadband connectivity across 153 countries, the company has a great opportunity to cash in on its “fabulous” brand. “We’ve been there for 120 years”, noted Marsh, while some rivals had “pulled back their efforts”.
The board is predicting operating profit before depreciation and amortisation (Ebitda) of £430m for the year ending March 2010, and the payment of a juicy 4.5p dividend (yield 4.7%) in 2011.
So I would value the group on a seven-times Ebitda multiple. After deducting net debt of £25m and a £153m pension deficit, but adding back £3.5bn of carried forward tax losses, it delivers an intrinsic worth of around 130p per share. That’s nearly 40% upside from current levels.
So what are the risks? There are the usual challenges of operating in a fast-moving environment and going head-to-head with giants such as AT&T, Telefonica and Deutsche Telecom. The ongoing decline in its traditional voice and other legacy products also needs to be watched, together with foreign-currency fluctuations and regulatory issues. Ofcom has already said that BT’s wholesale line charges will increase by RPI+3.8%. That creates an estimated £10m-£20m headwind for interconnection fees this year.
All the same, with improved demand and margins rising, the shares look attractive. There is even a decent chance the firm will be bought over the next few years by a trade buyer. Preliminary results are due out on 26 May.
Recommendation: SOLID BUY at 94p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments