Comparing Telecom with its peers

With a significant percentage of the population applying for shares in the Telecom Eireann flotation, all eyes will be on the announcement regarding the basis on which shares are to be allocated next week. At the same time the all-important price at which investors will get these shares will be announced on July 7th. Given the hype that has surrounded the run up to this share issue and the positive response from the public, a successful flotation and a healthy after-market in the share price is virtually assured.

However, behind the hype there has been some comment about the paucity of hard financial information available on the company and the difficulty in assessing the true underlying profitability of Telecom Eireann. Much of this obfuscation is because the most recent set of published annual accounts for Telecom includes a series of one-off exceptional items of expenditure related to the flotation process and pension funding. Stripping these out, analysts are tentatively estimating that at the middle of the issue price range of around £3, Telecom would be on a price earnings ratio of more than 30 and an Enterprise Value/EBITDA of around 11.

This latter ratio is considered to be a more inclusive measure of value. Essentially it takes the total market capitalisation of a company (less debt), and divides this by a measure of the annual cash generated by the enterprise.

The accompanying table presents the current valuations of a selection of European telecom companies. Most of these companies are far larger than Telecom and a number, such as Cable and Wireless, would have a broad spread of international operations. What is immediately apparent from these figures is that Telecom is going to be one of the more expensive telecom companies in Europe. Of course it will be rated more cheaply than a company such as Vodafone, however, Vodafone is focused exclusively on the rapidly growing cellular market and is therefore expected to grow its profits much more rapidly than the incumbent telcos such as Telecom Eireann.

A better comparison for Telecom is probably the other European companies that have been privatised such as KPN, Telefonica and Portugal Telecom. Assuming that Telecom trades at the higher end of the indicated issues price range, it can be seen it would be much more highly rated than, for example, KPN which incidentally is likely to end up holding just under 30 per cent of Telecom.

The arguments justifying this higher than average rating for Telecom Eireann relate almost entirely to the supercharged Irish economy which shows no sign of slowing down. Indeed, the medium-term fundamentals for the economy continue to look particularly good. These better growth fundamentals certainly justify some growth premium for Telecom Eireann. Furthermore, it is argued that Telecom will be seen by some overseas investors as a good proxy for the overall Irish economy and therefore they will concentrate their Irish investments on it.

Only time will tell how the various influences on Telecom will play out.