MANITOBA TELECOM SERVICES INC. $32 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 67.0 million; Market cap: $2.1 billion; Price-to-sales ratio: 1.2; Dividend yield: 5.3%; TSINetwork Rating: Average; www.mtsallstream.com) gets around 55% of its revenue from its 1.3 million telephone and wireless customers in Manitoba.
The remaining 45% comes from its Allstream division, which sells integrated telephone, Internet and other communication services to businesses across Canada. Manitoba Telecom is now conducting a strategic review of Allstream. This could lead to a sale of some or all of this business.
Allstream is profitable, but while it accounts for almost half of Manitoba Telecom’s revenue, it only contributes 18% of the company’s operating earnings. So selling the division would let Manitoba Telecom expand its more profitable operations.
As well, Ottawa recently relaxed foreign-ownership limits on telecom companies with less than a 10% market share. That should help Manitoba Telecom attract a wide variety of potential buyers.
Meanwhile, the company continues to benefit from rising demand for wireless and Internet services. In the three months ended September 30, 2012, its wireless revenue jumped 29.4%; Internet TV revenue gained 7.7%; and high-speed Internet revenue rose 6.9%. However, falling demand for traditional phone services cut Manitoba Telecom’s overall revenue by 4.3%, to $424.3 million from $443.2 million a year earlier. A 9.5% drop in Allstream’s revenue also contributed to the decline.
Even with the lower revenue, earnings rose 10.3% in the quarter, to $40.8 million from $37.0 million. Earnings per share gained 8.9%, to $0.61 from $0.56, on more shares outstanding. These gains are mainly due to savings from an ongoing restructuring plan, which includes job cuts and exiting unprofitable businesses. The plan cut the company’s expenses by $23.7 million in the latest quarter compared to a year earlier.
The $1.70 dividend still seems safe and yields 5.3%. The stock also trades at just 12.1 times the $2.65 a share that it probably earned in 2012.
Manitoba Telecom is a buy.
