TyCom Ltd. (TCM)#
TCM: Adj. EPS & Near Term Ests. for Shift to 1S (Buy, Speculative)
Construction Mkt Cap: $7,332.4 mil.
April 11, 2001 SUMMARY
* We are updating our EPS, cash revenue and adjusted
TELECOMMUNICATIONS EBITDA estimates for TCM's latest guidance as well
SERVICES as greater visibility on capacity pricing.
Jack B. Grubman * We're raising our Q2FY01E EPS to $0.10 vs. $0.05
prev., leaving Q3FY01E at $0.05 & reducing Q4FY01E
EPS to $0.38 vs. $0.44 prev. Our $0.10 Q2FY01 est.
Christine R. Gochuico reflects TCM's higher than prev. exp. gross margin
(GM) on Q2FY01 construction rev's & puts us at the
low end of TCM's $0.10-$0.12 guidance.
Charles Simonds * Add'ly adj. our rev. & EBITDA ests. to reflect
higher than prev. exp. constr. rev's due to SEACN
proj. beg. in Q4FY01, but lower than prev. exp. cap.
pricing and a fiber pair sale that we no longer
expect in FY01. Also reducing our capacity gross
margins to 50% as TCM now expects a higher
proportion of leases vs. IRU sales (which means
higher GAAP #s, both rev's & costs).
* We expect add'l color and guidance on TCM's 4/18
conf. call and are keeping our TCM target price
under review.
FUNDAMENTALS
P/E (9/01E) 20.7x
P/E (9/02E) 25.2x
TEV/EBITDA (9/01E) 3.2x
TEV/EBITDA (9/02E) 1.1x
Book Value/Share (9/01E) $0.25
Price/Book Value 55.3x
Dividend/Yield (9/01E) NA/NA
Revenue (9/01E) $2,960.4 mil.
Proj. Long-Term EPS Growth NA
ROE (9/01E) 14.1%
Long-Term Debt to Capital(a) 89.7%
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (4/11/01) $14.09 Current Rating 1S
52-Week Range $46.25-$9.45 Prior Rating 1S
Shares Outstanding(a) 520.4 mil. Current Target Price $75.00
Convertible No Previous Target Price $75.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
9/00A Actual $0.14A $0.16A $0.20A $0.18A $0.68A
9/01E Current $0.14A $0.10E $0.05E $0.38E $0.68E
Previous $0.14A $0.05E $0.05E $0.44E $0.68E
9/02E Current NA NA NA NA $0.56E
Previous NA NA NA NA $0.56E
9/03E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 9/01E $0.69; 9/02E $0.73; 9/03E NA
Calendar Year EPS: 12/00A NA; 12/01E NA; 12/02E NA; 12/03E NA
OPINION
We are adjusting our fiscal 2001 revenue, EBITDA and EPS estimates to reflect
TyCom's latest guidance and a fiber pair sale we no longer expect to happen
in FY'01, lower than previously expected capacity prices, a shift towards
more leases than IRU sales and the incremental impact of the recently
announced SEACN (South East Asia Cable Network) project to construction
revenues beginning in Q4FY01.
TyCom's latest guidance calls for EPS of $0.10 - $0.12 in Q2FY01, up from the
$0.05 range previously and for full year EPS to stay in the $0.69 range,
implying that Q4FY01 estimates would be lower than previously expected.
However, TyCom mentioned that guidance for full year 2001 could be reviewed
(presumably to the upside). The company attributes the Q2FY01 increase to
higher than previously expected revenues of approximately $550 million versus
about $500 million previously. Obviously, since TyCom does not plan to begin
selling capacity until Q4FY01 (calendar Q3'01) the increase is attributable
to the construction business. Additionally, TyCom expects stronger than
previously expected gross margins in its construction business in Q2FY01 due
to more higher margin maintenance revenues than previously expected.
TyCom also has announced that while it still expects revenues in the $2.7 -
$2.8 billion range for FY 2001, that it expects the mix to shift more towards
construction revenues from capacity revenues in Q4FY01. This is due primarily
to the SEACN construction project (in which TyCom plans to take a minority
equity stake) that is worth approximately $1.2 billion and is expected to run
about five to six quarters beginning in Q4FY01 as well as greater visibility
on capacity pricing and a fiber pair sale on the transatlantic system that we
no longer believe will happen in fiscal 2001.
Additionally, we believe that capacity pricing on the transatlantic side has
come down faster than most people expected, due just as much, we believe, to
higher than expected volume as the dramatic increase in transatlantic
capacity in 2001 (which is old news anyway). In any event, we now expect
that the base price on a transatlantic STM-1 (the base capacity unit) is
closer to $700,000 than the $1 million figure we previously estimated. If
you further adjust for volume discounts, we believe that the blended price is
closer to $500,000 - $600,000 range. A rule of thumb in the subsea business
is that each 4x increase in unit volume yields only a 3x increase in price
(e.g. if a single STM-1 was priced at $1 million, an STM-4 would result in a
unit price of $750,000, a STM-16 would result in a unit price of about
$560,000 and so on). The multiwavelength transatlantic presales recently
announced by TyCom and Flag suggest to us that demand for larger volume
orders is up, and consequently we believe that unit pricing on a volume
adjusted basis is lower than previously expected, although this is somewhat
mitigated by higher volumes.
Next, we believe that subsea carriers are seeing a shift towards more
capacity leases versus IRU sales. This means that carriers will recognize
more revenues and costs upfront (GAAP) and less on a cash or adjusted EBITDA
basis. Consequently, we believe that adjusted EBITDA margins may not be as
robust as we previously thought, but still quite respectable.
Finally, on February 27th, TyCom announced that it won an approximately $1.2
billion contract to build SEACN. While TyCom plans to take an minority
equity stake in SEACN, these revenues were a large addition to its
construction backlog. TyCom expects the SEACN project to take about five to
six quarters, beginning in Q4FY01.
While we still believe that the subsea carrier business is a viable,
profitable business, we do note that Global Crossing's has reduced is
exposure on transatlantic capacity sales to about 2% of cash revenues by
geographically expanding its network and productizing its network.
Additionally, our belief that Global Crossing will show increasing visibility
on getting service contracts from brand name commercial customers, as we
noted in our Global Crossing note yesterday (April 10th) "GX: Concerns Re:
CZN Ability to Fund ILEC Acq From GX Unfounded", was prescient. Today (April
11th), GX announced that it had won a contract to provide global connectivity
to the Chicago Stock Exchange (the second biggest exchange in the US).
CHANGES TO OUR ESTIMATES
We have attempted to adjust our TyCom model for all the aforementioned
changes to revenue mix, EBITDA and EPS. Consequently, we have lowered our
capacity sales on a GAAP basis to $527.6 million from $769.2 million
previously. However, since we now expect approximately $200 million in
incremental construction revenues from the SEACN project ($1.2 billion over
six quarters) in Q4FY01, our total Q4FY01 revenues are going to $1,058.4
million versus $1,109.2 million on a GAAP basis previously---on a cash basis
our Q4FY01 revenue estimate goes to $1,355.1 million versus $1,461.4 million
previously. Our full year fiscal 2001 revenue estimates are now $2,663.6
million and $2,960.4 million on GAAP and cash bases, respectively, versus our
previous GAAP and cash estimates of $2,694.6 million and $3,046.8 million,
respectively.
Additionally, we are lowering our EBITDA estimates to account for the shifts
in revenue mix---construction carries a lower gross margin (20-30%) than
capacity sales (up to 50%)---as well as what we believe are a higher than
previously expected proportion of capacity leases as opposed to IRU sales
which means that more revenues and expenses will be recognized upfront. Our
Q4FY01 GAAP EBITDA goes to $330.6 million versus $625.8 million previously,
and our adjusted EBITDA goes to $627.4 million versus $978.0 million
previously. Consequently, our full year GAAP and adjusted EBITDA estimates
go to $587.3 million and $884.1 million, respectively, versus our previous
GAAP and adjusted EBITDA estimates of $850.1 million and $1,202.3 million.
On an EPS basis, we are raising our Q2FY01 estimate to $0.10 from $0.05;
keeping out Q3FY01 estimate at $0.05; and lowering our Q4FY01 estimate to
$0.38 from $0.44---so our fiscal 2001 estimate remains unchanged at $0.68.
Additionally, our target price is under review pending additional guidance
and color on TyCom's Q2FY01 earnings call, next Wednesday (April 18th).
NET/NET
We are adjusting our fiscal 2001 estimates for TyCom's latest guidance,
additional visibility on capacity pricing and what we believe is a growing
trend towards capacity leases as opposed to IRU sales. We have attempted to
adjust for these changes, and are raising our Q2FY01 EPS to $0.10 from $0.05,
but lowering Q4FY01 to $0.38 from $0.44 to keep our fiscal 2001E EPS at
$0.68. Additionally, we have lowered our revenue and EBITDA estimates for
Q4FY01.
While we still believe that the subsea carrier business remains an attractive
business model and that TCM is fully funded, we are keeping our target price
under review pending further guidance in TCM's Q2FY01 conference call next
Wednesday (4/18). |
