Genuity pushes sell button on Manitoba Tel

I’m not sure what it means for the economy, but when Manitoba Telecom (MBT:TSX) starts to have challenges…. Here is a snapshot on the recently released quarter from the research team at Genuity Capital Markets:

“· MTS reports weaker than expected margins and FCF – At $486 million, Q2/08 revenue was in line with our $484 million forecast and up 2.6% over Q2/07. However, EBITDA of $171 million was below our $174 million forecast and flat due to a 74 bps YoY decline in EBITDA margin. Baseline EPS of $0.81 was below our $0.85 estimate due to lower than expected EBITDA and higher than expected depreciation, and only up slightly from $0.79 in Q2/07. Finally, consolidated FCF (including pension solvency and restructuring) of $54 million was well below our $81 million estimate due to lower than expected EBITDA and higher than forecast capex. It was down 39.5% from Q2/07.

· Incumbent EBITDA was flat YoY due to margin pressure – Incumbent revenue of $228 million was below our $231 million estimate, but up 1.6%. The real disappointment was incumbent EBITDA of only $125 million. It was below our $128 million forecast and flat YoY due to a 72 bps decline in margin.

· MTS Mobility reported the worst ARPU decline in the sector and it could incur material charges – While the 8,584 net subscriber additions beat our 7,700 forecast and were flat YoY, at $56.46, wireless ARPU was well below our $57.10 forecast and down 2.1% (the worst reported by a Canadian wireless operator in the quarter). ARPU pressure could increase considerably after AWS new entrants launch service. In addition, MTS could incur $40-50 million of wireless charges over the next two years due to the transitioning of certain wireless service requirements away from Bell Mobility. Of the total, a $10 million charge was taken in the quarter.

· Allstream’s revenue growth was offset by margin pressure – At $258 million, Allstream’s revenue easily beat our $252 million estimate and was up 3.5% YoY. However, driven by a 43 bps decline in margin, at $46 million, EBITDA was only up 1.1% and in line with our estimate.

· Downgrading to a SELL and lowering target to $40.00 from $43.00 – We have lowered our margin, EPS, and FCF estimates and added wireless charges and A/R securitization. This lowers our price target and our rating to a SELL from a HOLD.”

Retail investment advisors will recall that Manitoba Telephone Services was one of the sample “conservative” GET-PAID-WHILE-YOU-WAIT stocks highlighted as a prospective stock pick in the IPO Roadshow Greensheet of the Decade of Daddy Fund™ (aka O’Leary Global Equities Income Fund, OGE-UN:TSX; see prior post “O’Leary Fund promises to share the wealth and wisdom“, May 8-08).

MRM