Johann Heaven, Contributor
Left: Johann Heaven. Right: Rodney Davis, president of Cable and Wireless Jamaica. - FILE PHOTOS
The following analysis of Cable & Wireless for the third quarter ended December 31, 2005 was carried out by Johann Heaven, assistant vice-president for financial planning and analysis at Dehring, Bun-ting & Golding. He is the first quarter winner of the Jamaica Stock Exchange's Analyst of the Year Competition.
INCORPORATED IN May 1987, Telecommunications of Jamaica (TOJ) changed its name to Cable and Wireless Jamaica Limited (CWJ) on February 5, 1998.
The principal activity of the group and the company is the provision of domestic and international telecommuni-cation services under various licences granted under the Telecommunications Act.
The company is an 82 per cent subsidiary of Cable and Wireless Plc, which is incorporated in England.
Activities of the group are organised into four primary segments, namely (i) fixed line (ii) mobile (iii) broadband and (iv) business solutions and other services.
INDUSTRY TRENDS
The global telecommunications industry has been in transition over the past couple of years from an industry dominated by 'natural monopolies' to an industry that's fully liberalised and competitive.
The Jamaican telecommunications industry has been no different, with CWJ's monopoly over the local market coming to an end on March 1, 2003 with the full liberalisation of the industry. Since then there have been a number of new entrants to the market that have threatened to challenge CWJ's dominant position in the market and in some cases (Digicel) have been successful.
Additionally, the industry which is dominated by technology that has a two to three year transition cycle, has also experienced a fundamental technological shift over the past couple of years, with a transition from a fixed line 'analog' infrastructure to wireless and digital technology.
Traditional fixed line subscribers are being replaced by mobile phone subscribers, as seen in the chart below.
FIXED LINE SERVICES
The local fixed line market has been plagued with declining subscriber numbers, pressures on margins and insufficient coverage, especially in the rural areas. CWJ currently services over 500,000 landlines and has come under increased competition over the past months with a few new entrants to the industry.
Digicel has acquired a licence to provide landlines and will be looking to attract business clients as the entry point into this segment of the market.
The latest entrant to this market, Flow, expects to make a significant impact in this area.
Over the past couple of months the growth in the mobile market has slowed considerably, as the market has become quite saturated.
Currently, Digicel is the market leader with approximately 1,300,000 subscribers or 65 per cent of the market share.
CWJ controls approximately 30 per cent of the market share, with the remaining five per cent attributable to MiPhone, owned and operated by Oceanic Digital.
There is talk of the possibility of a fourth mobile provider, maybe AT&T, entering the market. It is believed, however, that the market is not large enough to accommodate this.
OTHER SERVICES
According to the Deputy Director of the Office of Utilities Regulations (OUR) Courtney Jackson, less than 10 per cent of the Jamaican population has direct access to the Internet and so there is tremendous growth potential for this market segment.
The cost of connecting to the Internet in Jamaica is also very high as CWJ is the only operator that provides connection to the global Internet network, which forces all other providers to use their network.
A consortium is, however, currently involved in constructing a fibre optic cable, which will force CWJ to compete in this part of their business as well, but it will not be ready for another two years.
PROFITABILITY
For the nine months ended December 31, 2005, Cable and Wireless Jamaica Limited generated revenues of $16.9 billion, an increase of one per cent over the similar period last year.
This is the first time in over three years that the tele-communications 'giant' has been able to achieve increased revenues, as over the past three years revenues have declined at an annual average rate of nine per cent. This turnaround is the result of a number of new initiatives.
Firstly, with the introduction of their 'Anyone' mobile plans in September 2005, they have reported that the company's active mobile subscriber base has increased by nine per cent and monthly minutes of use have increased by 62 per cent.
This is a significant achievement, as they are now slowly clawing back mobile market share from Digicel.
Secondly, broadband revenues continue to grow significantly, with an increase in the subscriber base of over five times that of the same period last year.
Fixed line revenues, on the other hand, continue to be pressured, as the declines in the subscriber base persist.
Gross profit for the nine months period increased by four per cent to $11.6 billion, again another first time increase in over four years.
This was achieved with the containment of cost of sales which fell by six per cent, as a result of the decision made earlier in the year to reduce subsidy levels on the mobile handsets.
This has resulted in a slight recovery of the gross profit margin to 69 per cent, up from the 67 per cent in the previous year.
Operating profits and margins, on the other hand, declined by eight per cent and two per cent, respectively.
Management has attributed this to higher oil prices and increased spending on marketing, especially for the mobile division which caused a nine per cent increase in operating expenses for the nine months.
EXPENSES
Other expenses, which include mostly net interest payable and foreign exchange losses, fell by $111 million to $555 million during the period as a result of a switch to mainly Jamaican dollar borrowing and the relative stability of the Jamaican dollar over the period.
CWJ thus posted net profits of $1.57 billion for the nine months ended December 31, 2005 - a four per cent decline when compared to the previous period last year.
This translates to an earnings per share (EPS) of 9.33 cents and a return on average equity of 11 per cent, compared to 12 per cent last year.
Total equity climbed 12 per cent to reach $19.2 billion, driven by a spike in retained earnings that moved from a loss to a gain of $1.48 billion.
Return on equity reached 13 per cent compared to its industry average of 12 per cent for the year ended March 31, 2005.
Although total current asset decreased by five per cent, total assets grew by five per cent or $1.8 billion due to line items property, plant and equipment and employee benefits that improved 10 per cent and 25 per cent, respectively.
RISE IN LIABILITIES
Total liabilities decreased by two per cent to $18.1 billion for the year-end consequent to a drop in current liability of 12 per cent due to the fall in line items bank overdraft (100 per cent), current portion of loans (80 per cent), taxation (90 per cent) and due to related companies (89 per cent).
The rise in non-current liabilities from $2.4 billion to $4.03 billion was responsible for the debt to equity ratio climbing seven percentage points to 21 per cent
There was a slight upward shift in current ratio from 0.41 in 2004 to 0.45 in 2005. This is the lowest when compared to the industry average at 2.10.
NOTE: See Financial Gleaner tomorrow for continuation of the analysis.
Johann Heaven is a chartered financial analyst charterholder.
