Brokers put Telecom share sale on hold

Given the early hype, Telecom Eireann shareholders are probably a bit confused and concerned about the current malaise in the share price. At around #4.30, it's an awful long way from the #5.30 paid by one unfortunate investor in the grey market after the July flotation and the #5.00 the shares reached a few weeks ago.

At this stage, if you weren't able to get out of Telecom at #4.90-#5.00, you're probably better off holding tight and waiting for an improvement. However, judging by the latest report from Dolmen Butler Briscoe, it may be some time before Telecom scales reach those heady heights again.

In fairness, Dolmen has never been a huge fan of Telecom and had the share on its "sell" list weeks ago. After the recent slump in the shares, that recommendation has moved to a "hold" with the broker suggesting a trading range for the shares of #4.15 to #4.45. For Telecom's sake, let us hope that the bottom of that price range does not become the norm - #4.15 is not very much removed from the #3.90 flotation price.

Dolmen previously had pencilled in a #3.60 to #4.20 valuation for Telecom based on a sum of the parts valuation. That has now been altered for a number of reasons, largely based on the mobile phone and Internet business.

Dolmen has assumed a net increase of 85,000 subscribers in the Eircell mobile business but is decreasing the enterprise value per subscriber from #4,000 to #3,500 based on the recent British Telecom/ Cellnet and Deutsche Telekom/ One2One deals in Britain. This results in a reduction in eps of 1.13 cents.

However, the news on the Internet business is better for Telecom, with the Freeserve flotation in Britain crystallising a value per internet customer of #2,500. With 64,000 subscribers, that translates to an extra 7.25 cents per share.

When floated, Telecom's enterprise value/EBITDA multiple was justified by the group's higher than average growth prospects. But does that potential growth justify a 1999 EV/EBITDA of almost 12.5 times when not a single other European telco is trading on a double-digit multiple?