Cable & Wireless Worldwide (CWW), the FTSE 250 telecoms group, provides critical communication, web and data services to large organisations. However, it has seen its shares savaged over the past six months, underperforming arch-rival BT by a whopping 70%. This reflects concerns about its exposure to the cash-strapped British public sector (12% of sales) and a £155m pension hole. So why, for me, is Cable & Wireless an early Christmas present for any investor?
Firstly, it has consistently lifted its share of the £7bn British corporate telecoms market, from 13% in 2005 to 19% today. Indeed, it now ranks as the number-two player in the sector. It aims to take 25% of the market as customers continue to opt for its flexibility and first-class products. For instance, the firm recently bagged prestigious contracts with Tesco Bank to provide managed data-centre and hosted-voice services for the retailer’s call centres in Newcastle and Glasgow. It also secured a similar £10.3m deal with the Department for International Development on top of a £82m agreement with the Foreign & Commonwealth Office.
Going forward the economic slump could accelerate the trend to outsource in-house operations. Better still, given the strategic importance of telecommunications, larger suppliers are also faring better than smaller ones as customers insist on greater levels of network resilience, cyber-security and disaster recovery protection.
Cable & Wireless Worldwide (LSE: CWW), rated a BUY by Nomura
However, this is not just a British story. As well as benefiting from the popularity of bandwidth-hungry applications, such as video-conferencing, the firm also has growth opportunities overseas (25% of revenues) in countries such as India. At the interims CEO Jim Marsh said “demand for our products continues to be good, as enterprises increasingly leverage IP-based data networks. What we see the government trying to do is drive real competition and achieve the best value. We are a part of that.”
The City is predicting turnover and underlying earnings per share (EPS) of £2.2bn and 6.6p respectively for the year ending March 2011. A juicy 4.5p dividend is equivalent to a 6.8% yield. On this basis I’d value the group on six-times earnings before interest, tax, depreciation and amortisation (EBITDA). After adjusting for the £35m of net debt, the pension deficit and carried forward tax losses (worth about 20p per share), I get an intrinsic worth of around 110p. That’s more than 70% upside from current levels.
Fine, but what are the possible risks? There are the usual challenges associated with operating in tough global markets. There’s also the ongoing decline in its traditional voice and other legacy products (24% of gross profits). Then there’s its exposure to the ailing Irish economy, foreign currency fluctuations and regulatory issues.
Despite all that, and the prospect of further government cut-backs, the group has a great heritage in supplying worldclass telecom networks. With the stock on such a paltry rating, there is every chance it will be snapped up by a trade buyer. The likes of AT&T, Telefonica, Vodafone and SingTel are front of the queue. Nomura have a target price of 90p.
Recommendation: BUY at 62p
Disclosure: I own shares in Cable & Wireless Worldwide.