Value Line has initiated coverage of Manitoba Telecom Services (MBT.TO) in its flagship product, The Value Line Investment Survey. Manitoba Telecom, also known as MTS Allstream, is a leading communications provider in Canada and the market leader in Manitoba. MTS is based in Winnipeg, Manitoba and has more than 4,800 employees across Canada.
The company does business in two segments. MTS, operating just in Manitoba, is the market leader there. It provides wireless, broadband (high speed Internet and digital television), converged Internet protocol (IP), unified communications, security, home alarm monitoring, local access, long-distance and legacy data services. Allstream, operating throughout Canada, offers IP-based communications, unified communications, voice and data connectivity, and security services to businesses and government organizations.
The company’s history dates back to 1846, when Montreal & Toronto Magnetic Telephone Company was organized by the Montreal Board of Trade. Numerous changes occurred over the next 150 years. MTS made its debut on the Toronto Stock Exchange on January 7, 1997. The company acquired Allstream (formerly AT&T Canada) in 2004 for $1.7 billion. In 2013, MTS reached an agreement to sell Allstream for $520 million (following a strategic review of this operation), but the Canadian government rejected the deal later that year.
In 2013, MTS generated over $1.6 billion in revenues. (Note: The company’s financial statements are based on International Financial Reporting Standards and are in Canadian dollars.) Of that amount, 52% came from its strategic lines of business: wireless, broadband, and converged IP. However, this figure declined 4% from the 2012 level, and pretax income (excluding two nonrecurring items) fell 12%. The disruption of the rejected Allstream sale hurt the company’s results. Although Allstream’s cash flow is negative, MTS as a whole still generated free cash flow, and investors should note that the company benefits from a unique tax asset that will provide over $55 million in cash annually through 2020, at least.
MTS wants to “own the home” in Manitoba, providing wireless, television, Internet, home telephone, and security services. The company seeks to bundle its services to homeowners through its MyBundle offering, and had nearly 100,000 such customers as of year-end 2013. A survey last year indicated that MTS is the second-most recognized brand in the province. Even so, there is still room for expansion in Manitoba, and MTS is continuing to invest capital so that it can offer the latest technology, such as a 4G LTE network. As for Allstream, it is one of only three national providers in business markets. Its strategic objective is to reap benefits from its national fiber network and exit low-margin legacy businesses.
The telecom has faced litigation concerning its administration of one of its pension plans following its 1997 privatization. This resulted in a $142.1 million (pretax) charge against earnings in the fourth quarter of 2013. Other risk factors include competition with much larger companies such as Rogers Communications (RCIB.TO), TELUS Corporation (T.TO), and Shaw Communications (SJRB.TO); the need to keep up with changing technology; the state of the Canadian economy; and exposure to legacy businesses that are declining.
The company’s balance sheet is in decent shape. Long-term debt made up 37% of total capitalization as of March 31, 2014. MTS’s securities have investment-grade ratings from credit-rating agencies. We consider the stock suitable for conservative investors. It also offers some appeal for income-oriented accounts, with a dividend yield of over 5%. (Dividends may be subject to a nonresident withholding tax.) Finally, investors should note that there has been takeover speculation about MTS, although we are not recommending that its shares be purchased solely for buyout possibilities.
For a more thorough look at MTS, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have a position in any of the stocks mentioned.