Bottom Line: C&W pins hopes on China

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The Independent Online
CABLE & Wireless is a premium- rated share because of its unique position in some of the fastest- growing telecommunicatons markets. But this could look cheap if the company, via its 58 per cent stake in Hong Kong Telecom, manages to achieve the status of preferred telecoms supplier to the vast potential Chinese market.

There are worries that Mercury in the UK will find the going progressively tougher after an underlying 19 per cent profits rise. C&W was fuming not so quietly yesterday about the chunky access deficit charges it must pay British Telecom, running into 'tens of millions' now that its market share, up 3 points to 14 per cent, has risen above 10 per cent.

Having sacrificed pounds 55m of revenues last year to match BT's price cuts, Mercury will also have to pay its due share of a pounds 700m overall reduction in telecoms prices in the current financial year. One-2-One is attracting customers at a satisfactory speed but C&W is predictably shy about revenues, and roll-out losses will probably double from pounds 33m to over pounds 60m this year.

But Hong Kong and Asia represent two-thirds of C&W's top line operating profits. Linus Cheung, chief executive of HK Telecom, was wheeled out yesterday to remind the City that Chinese government telecoms installation plans currently allowed for 12 million new telephone lines a year for each of the next seven years. This compares with C&W's present installed base of 5 million lines in Hong Kong, Britain and the Caribbean.

Last year's results are also a reminder of C&W's financial strength. Although pounds 95m of currency benefits flattered pre-tax profits, reducing reported earnings growth of 22 per cent to an underlying 10 per cent, there was an equal net impact in the other direction from special factors, including start-up costs and one-off losses.

Cash flow is back on an even keel allowing the group to step up its capital spending from pounds 1bn to pounds 1.2bn this year after a five-year run in which it had fallen from 37 per cent to 21 per cent of turnover.

'Federalism' in management is saving up to pounds 100m in costs annually. Underlying earnings growth may remain unspectacular but consistent, and a price/earnings ratio of 16.7 assuming pre-tax profits of pounds 1.25bn, still looks good value.