The Investment Column: CWC looks serious now

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The Independent Online
IT WILL take some more time, but Cable & Wireless Communications may yet turn itself from the ugly duckling of the telecoms sector into something resembling an elegant swan.

When the business was thrown together through the merger of long-distance operator Mercury and three cable companies last year, it seemed doubtful that CWC would ever be a credible competitor to the likes of British Telecom.

Thirteen months, thousands of redundancies and a pounds 200m restructuring charge later, that proposition no longer seems so laughable. Although CWC's poor network means it is losing ground in the business market, the company has embarked on a pounds 400m upgrade which should enable it to face the competition on level terms.

Meanwhile Head Start, a cheap package combining cable television and cable telephony, has proved popular with residential customers. Penetration rates have risen from 27 to 29 per cent, while over half of those customers now take both the television and telecoms services, compared with 47 per cent last year. Churn rates - the proportion of customers cancelling their service - did rise but this is at least partly down to CWC weeding out persistent late payers.

Looking ahead, there is digital television. Cable TV has, until now, been a carbon copy of the offerings from the likes of Sky. In the digital era, however, CWC will be able to offer all the 200 channels planned by Sky while also offering access to the internet - through the television - at many times the speed currently available. What's more, CWC subscribers won't have to fork out pounds 200 for a set-top box, as they will with other digital television services.

This is a long-term prospect. Yet Graham Wallace, CWC's chief executive, is bullish enough to promise 15 per cent revenue growth this year. Add in widening margins as the benefits of restructuring flow through and growth prospects look good. That said, the shares have had a fantastic run, more than doubling in value since last November. They put on 7.5p to 451.5p yesterday, and now trade on a multiple of 33 times this year's forecast earnings. Not cheap, but still a good long-term bet.