Manitoba Telecom Services Inc. $49 - Toronto symbol MBT

MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service. Manitoba Tel’s revenue fell from $909.2 million in 2002 to $824.0 million in 2003. In June 2004, the company paid $1.6 billion for Allstream Inc., a national provider of telecom services to businesses. The purchase doubled the company’s size, and cut its reliance on Manitoba. This business now accounts for 55% of its total revenue. The Allstream acquisition pushed revenue up to $2.0 billion in 2005. Growing competition cut revenue in 2006 to $1.9 billion. Profits from ongoing operations, excluding nonrecurring items, rose from $1.54 a share (total $99.0 million) in 2002 to $2.52 a share ($170.4 million) in 2005. Earnings slipped to $2.50 a share ($169.6 million) in 2006. The company is close to completing a major restructuring, which included the sale of non-core assets such as its telephone directory business. It also aims to cut $120 million out of its annual costs by the end of 2007. Manitoba Tel is using the cash to improve shareholder value, including a $320 million share buyback plan. The savings should also help it maintain its $2.60 dividend, which yields 5.3%. The company will probably generate $7.75 a share in cash flow, so it can afford the dividend as well as its planned capital expenditures of around $4.50 a share. Manitoba Tel is doing a good job of holding on to customers in an increasingly competitive market, mostly by selling its services in bundles. A key part of its success is its digital TV service, which uses high-speed Internet technology to transmit TV signals over ordinary telephone lines. Since its launch three years ago, this service now has 27% of Winnipeg’s TV market. The company’s fast-growing wireless operation is also helping it offset lower local and long distance revenue. In 2006, less than 1% of Manitoba Tel’s postpaid wireless customers switched to a new provider once their contracts expired. High customer satisfaction cuts the need for Manitoba Tel to offer customers free minutes or other costly incentives. Manitoba Tel is now thinking about expanding its wireless operations outside of Manitoba. It recently teamed up with Quebecor Inc. to lobby communications regulators to bar Canada’s three main wireless providers (BCE, Telus and Rogers) from bidding on new radio frequencies. That would make it easier for Manitoba Tel and Quebecor to offer wireless service in major cities. A decision should come before next year’s auction. While revenue at the consumer operations is improving, the company’s Allstream business unit continues to struggle. It has just 6% of Canada’s corporate telecom market, well below BCE’s leading 33% share. Allstream now plans to focus on smalland medium-sized businesses, which bigger companies tend to overlook. Despite its problems, Allstream still has plenty of value. Its accumulated losses will cut Manitoba Tel’s tax bill until 2014. Speculation that Manitoba Tel would convert itself into an income trust helped spur the stock upward early in 2006. It fell to $42 in November 2006 after Ottawa moved to tax income trusts, but it has moved up again on takeover rumors. It now trades at 18.9 times the $2.59 a share it will probably earn in 2007. Manitoba Tel is a buy.