MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; SI Rating: Average) is the leading provider of telecom services in Manitoba, with 1.8 million customers. It also provides telecom services to businesses across Canada through its MTS Allstream division.
Manitoba Tel acquired Allstream in 2004 as way to cut its reliance on residential customers in a single province. However, the business telecom market is extremely competitive, and Allstream has not been as profitable as the company hoped.
Based on the favourable reaction to BCE’s and Telus’s trust conversion plans, it’s more likely that Manitoba Tel will follow the same path. It would probably try to sell or spin off Allstream first, since the division’s uncertain cash flows would limit its appeal as a trust.
If Manitoba Tel decides to hang on to Allstream, however, it can use Allstream’s substantial tax losses to cut its own tax bill until 2014.
In the meantime, Manitoba Tel is focusing on cutting costs. It has already saved $70 million a year, and should reach its goal of $100 million in annual savings by the end of 2007.
Due to restructuring costs, Manitoba Tel lost $0.02 a share (total $1.2 million) in the second quarter of 2006. It earned $1.64 a share ($111.5 million) a year earlier. If you exclude unusual items, per-share income was unchanged at $0.75. Revenue fell slightly, to $500.0 million from $502.2 million, as lower local and long distance revenue offset gains from wireless and Internet access.
In October 2006, Manitoba Tel sold its telephone directories business for $281 million. The sale is a good idea, since this business faces growing competition from Internet search engines.
The company will probably use the proceeds to pay down its long-term debt of $851.4 million (0.6 times equity).
Lower interest charges will help the company maintain its $2.60 dividend, which yields 5.3%. The stock now trades at 18.9 times the $2.59 a share Manitoba Tel should earn in 2006.
Manitoba Tel is a buy.
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