Cable investors put on rose-tinted glasses; The Investment Column

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The Independent Online
The cable television industry and Eurotunnel are not obviously similar, but the fact that both started life digging holes in the ground is not the only link. Both came to the market with the prospect of years of losses before shareholders could enjoy a positive return and both faced the difficult prospect of transforming themselves from essentially construction project managers to marketing companies.

Valuing the cable operators that came to the market last year with any precision is as difficult as putting a sensible price tag on Eurotunnel has always been. With nothing but finger-in-the-air discounted cash-flow models to go on, or less than scientific per pop measures such as are favoured by mobile phone industry analysts, arriving at an acceptable share price is always going to be a stab in the dark.

General Cable's first-quarter figures yesterday, which showed a more or less maintained quarterly loss before tax of pounds 6.16m (pounds 6.2m), filled in some missing pieces in the valuation jigsaw. The good news was that its build programme is now about half-completed and on track for completion between 1998 and 2000.

Cash flow has started to improve and at the basic operating level, before interest and other charges, it is now marginally positive. Annualised revenue per home continued to improve, up 6 per cent to pounds 164. Importantly, the churn rate, which measures the proportion of subscribers giving up the service, fell from 29 per cent to 23 per cent compared with the first quarter of 1995.

The fall in churn rate is important because the other critical variable, penetration, remains stubbornly low. With only 23 per cent of houses passed by the cable companies in the General group taking the television service, three out of every four potential subscribers are shunning the product.

That compares with initial penetration estimates of about 40 per cent a year or so ago, the figure on which the industry's valuation models were premised on flotation. That would not matter unduly if share prices had fallen correspondingly, but with the companies trading at around their flotation levels investors appear to be staring at the sector through worryingly rose-tinted spectacles.

The other key to cable companies, and especially General Cable, is the extent to which they are now dependent on telephone services to make good the television shortfall in last year's calculations. Revenues per line held their own in the first quarter, but with BT's prices under pressure, and the cable companies selling themselves as a cheaper alternative, the outlook for the top line is not encouraging.

What is really worrying about the sector is what happens in a year or so when the roll out is complete and the numbers stop moving in the right direction simply by dint of adding houses to the network. When that happens, and investors start measuring the companies on earnings grounds rather than hazy cash-flow models, the fallout could be ugly indeed. Avoid.