MANITOBA TELECOM SERVICES INC. $30 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.7 million; Market cap: $2.0 billion; Price-to-sales ratio: 1.1; Dividend yield: 5.7%; TSINetwork Rating: Average; www.mtsallstream.com) has 1.3 million telephone and wireless customers in Manitoba. This business now accounts for 55% of the company’s revenue. The remaining 45% comes from its Allstream division, which provides integrated telephone, Internet and other communication services to businesses across Canada.
Revenue fell from $1.9 billion in 2006 to $1.8 billion in 2010, largely because the Allstream division lost a big client. Strong competition from cable companies has also hurt demand for the company’s traditional phone services.
Earnings rose 17.9%, from $2.57 a share (or a total of $174.9 million) in 2006 to $3.03 a share (or $195.8 million) in 2008. Earnings then fell 33.3%, to $2.02 a share (or $130.5 million) in 2010.
In response to the lower earnings, Manitoba Telecom continues to cut jobs and scale back its less-profitable operations. These moves lowered its annual expenses by $34.4 million in 2010. The company aims to find an additional $25 million to $35 million in annual savings in 2011.
Manitoba Telecom is using these savings to expand and upgrade its wireless network in Manitoba. These improvements are letting it sell more smartphones, including the hugely popular Apple iPhone. Strong demand for these phones and wireless data helped push up the company’s wireless revenue by 7.3% in the third quarter of 2011.
Internet focus starts to pay off
The company is now upgrading its traditional copper-wire networks to fibre-optic technology. That’s helping it sell more high-speed Internet and digital TV services. Revenue from these services jumped 12.7% in the latest quarter.
Allstream is also benefiting from its shift to Internet-based communication services. Strong sales growth in Internet services is offsetting lower demand for local and long-distance services.
Manitoba Telecom will probably spend $300 million on capital upgrades in 2011. It should report cash flow of $425 million for the year, so it can comfortably afford these outlays. The remaining $125 million is also enough to cover Manitoba Telecom’s projected 2011 cash dividend payments of $111 million. The annual rate of $1.70 a share yields 5.7%.
Takeover possibility a plus
Manitoba Telecom trades at 11.4 times its likely 2011 earnings of $2.63 a share. Its earnings could reach $2.81 a share in 2012, which gives the stock a p/e of 10.7. These are low multiples in light of the company’s strong market share in Manitoba. Moreover, Ottawa’s plans to open up Canada’s telecom industry to foreign investors could make Manitoba Telecom an attractive takeover target.
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