SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Cable&Wireless Communications
Cyclical upside and strong cashflow
CWC Group’s results for the full year 2009/10 were robust, with
many encouraging signs for the year ahead. Foremost amongst these
is the prospect of a cyclical recovery, which appears to be well
established in three of four CWC regions. Our analysis of leading
indicators in these regions suggests that the recovery in tourism,
hotel occupancy, gambling and GDP is continuing, with
improvements in the Caribbean too, and we believe it will act as a
driver of CWC’s FY10/11 results starting with Q1 on 21 st July.
Growing evidence of cyclical upside
A cyclical recovery appears to be well established in Macau, Panama and Monaco &
Islands. Macau has been particularly strong with gaming revenue more than
doubling in the first quarter of 2010 and real GDP growth of 30% y-o-y. CWC’s
other region, the Caribbean, seems to have stabilized and we continue to see
improvements in both GDP growth and the growth of tourist arrivals (see chart
below). We believe this recovery will translate into a better performance for CWC
in the coming months. Even the biggest problem area – Jamaica – has seen
improving GDP growth and tourist arrival trends (the latter up 9% in 1Q 2010).
Figure 1: Growth of tourist arrivals in the Caribbean
Tourist Arrivals (y-o-y growth, %)
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
Jamaica Barbados East Caribbean North Caribbean Average
Source: ExecutionNoble, Caribbean Tourism Organisation. Note: East Caribbean excludes St. Kitts & Nevis and North Caribbean
excludes Turks & Caicos compared to CWC's definitions of the regions.
We have not made many allowances for a recovery in our forecasts (1% revenue
growth for FY10/11), recognizing the potential fragility. It could be much better
than this especially if Caribbean swings into recovery. If there was 3% growth in all
the regions for the next couple of years, EPS and FCFE would rise by 10-20%.
Strong cashflow generation supports dividend
Management is making a clear commitment to the dividend, which although being
a “full payout” is covered by strong cashflow generation which will no longer have
to support Cable&Wireless Worldwide. Moreover, the dividend policy has been set
at the “low point” of the company’s cycle. On our forecasts the company will
continue to deliver sufficient cashflow to pay a progressive dividend even without
allowing for any potential cyclical upside.
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
http://www.execution-noble.com
BUY
29.9% upside
Fair Value £0.75
RIC, Bloomberg Code CWC.L, CWC LN
Share Price £0.58
Market Capitalisation £1.5bn
Free Float 100.0%
GBP m (unless stated) Mar-09 Mar-10 Mar-11 Mar-12
Net revenue 2,447 2,346 2,379 2,380
EBITDA 871 866 881 877
Capex 337 310 350 325
FCF 301 218 368 378
Net Debt 571 664 733 758
EPS (GBP) 0.10 0.12 0.07 0.08
DPS (GBP) 0.15 0.05 0.08 0.08
All financial estimates are "as reported"
DPS includes special dividends
Mar-09 Mar-10 Mar-11 Mar-12
EV / Sales 1.6 1.7 1.7 1.6
EV / EBITDA 4.7 4.8 4.6 4.6
P/E 9.0 6.5 11.1 9.7
FCF Yield (%) 10.7% 7.8% 13.1% 13.5%
FCFE Yield (%) 6.6% 6.3% 12.7% 13.5%
Dividend Yield (%) 17.8% 6.2% 9.5% 9.7%
Net Debt / EBITDA 0.7 0.8 0.8 0.9
All multiples based on underlying financials
Proportionate adjustments made where appropriate
Analysts
Will Draper
+44 20 7456 1694
will.draper@execution-noble.com
Andrew Hogley
+44 20 7456 1652
andrew.hogley@execution-noble.com
Nick Brown
+44 20 7456 1669
nick.brown@execution-noble.com
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