Friday, August 14, 2015

Sell Sell Cel!

Just three months ago, I discussed Cellcom as a potential value investment. The company was a market leader in an industry where market leadership has a strong advantage thanks to the economies of scale of network effects. The company was undergoing an industry price war, however, which made its price take a dive from the top rope.

Since then, the price war has more or less continued, but the share price has increased almost 40%! As such, I've decided to sell my shares and move on.

I suspect the company may still be a great long-term hold, but business conditions haven't improved as much as I would have liked, and so I am booking the price increase. Since my article, the company's cost cuts have no longer kept pace with the revenue declines, leading to continued shortfalls in income.

Capex hasn't been curtailed as much as I'd have liked to see, probably because the company is launching new services. It's quite possible these new services (e.g. tv, triple-play) will be big hits. But at the current EV/EBIT valuation, I'd have preferred to see this money used to pay down debt.

The company does recognize that debt is a problem, and so it has registered for an equity rights offering to existing shareholders. So basically instead of using cash flow to pay down debt, they are using cash flow to expand into a new business line, and then hitting up shareholders for extra cash to pay down debt.

Seems like a bit of sleight of hand to me. I'd say the proper way is to use cash flow to pay debt, and request new equity funds to startup the new entity if they want more funds. But I suspect they wouldn't get the funding that way, at least not at the same terms, so they are doing it this way.

For shareholders it's the same thing, though. And for me, that's not an attractive bet. I don't know what the company's financial forecast is for their new service nor how reliable that forecast is. As such I don't know how risky this project is, and so I have no interest in funding it.

In addition, there are a couple of recent class-action suits against the company for wrongfully selling its customer data. I don't know if the suits have any merit, because the company is not divulging much info about them.

Someday, I expect this company to trade at lofty multiples thanks to barriers to entry, rational behaviour among competitors, and an emphasis on cash-flow harvesting. The path there just seems a little more bumpy and further away than I thought.

1 comment:

Anonymous said...

Well done Saj.