NCB stockbrokers has given a cool assessment of eircom's growth prospects ahead of its flotation.
They citied the company's lack of a mobile business and cast doubt on its ability to sustain generous dividends due to its high debt levels.
In a research note published this morning, NCB said eircom has little international expansion possibilities, especially given its high level of borrowings. Even if the company re-enters the Irish mobile market, NCB believes opportunities are limited by the strength of Vodafone and O 2. "The only real growth opportunity for eircom is broadband," NCB concludes.
The broker also raised concerns about the sustainability of a generous dividend policy which is seen as the most attractive aspect of the flotation offer. Eircom is proposing a dividend yield of 6.8 per cent in its first year back on the market and similar payments look likely in the short term as eircom faces no immediate debt pressure. Its first repayment on its bank debt is not until April 2006 while its bonds mature in 2013.
However, eircom's European peers have drastically reduced their debts following the TMT (telecoms, media and technology) crash, leaving eircom as the most indebted telecom in its class. As a multiple of earnings, the average debt of European mid-sized telecoms is around 1.5 times 2004 earnings while eircom's debt is estimated at twice that level.
According to NCB telecoms analyst Ms Tricia McEvoy, without a growth business other than broadband, eircom's ability to reduce debt down to the industry average is therefore dependent on its ability to generate cash. With relatively flat revenues expected, cash generation is dependent on eircom's abilities to cut costs and make itself more efficient.
Ms McEvoy writes that while there is room to reduce costs, "the strong position of the ESOT could limit its flexibility in this area."
If eircom came under pressure to reduce its debt more quickly or had to endure a tougher regulator, NCB proposes that the dividend policy "may have to be altered."
Ms McEvoy adds that relative to its shares, eircom's bonds look attractive given their current yield of 5.5 per cent to 6 per cent which continue to perform well despite the recent downgrade by S&P.
NCB is more positive on Belgacom, the other telecom coming to the market. NCB said Belgacom is an attractive offering given its fixed-line, Internet, mobile and international carrier exposure, no pension issues, no meaningful debt and high operating margins . Belgacom also offers an expected dividend yield of around 5 per cent with ample potential for share buybacks.
"Relative to eircom's indicative valuation multiples, Belgacom appears good value at the indicated levels," NCB said.