View from City Road: C&W promise is not

difficult to keep The open-ended commitment yesterday by Cable and Wireless to 'double digit' growth in earnings - exchange rate effects aside - is less demanding than it looks. In Hong Kong Telecom, 58.4 per cent owned, and Mercury, Cable and Wireless has two businesses increasing profits at a rate of 15 and 24 per cent respectively. HKT represents more than 60 per cent of operating profit and Mercury another 20 per cent.

International telecoms traffic is expected to grow at more than 10 per cent a year for the next decade. HKT is strongly placed since China accounts for 44 per cent of all Hong Kong's international calls. Traffic between the two grew by 37 per cent last year.

Five years into its life Mercury is still generating call volume growth of 37 per cent, lifting its share of the UK domestic market from 8.4 to 10.5 per cent and the international market from 21 to 24 per cent.

In the case of both HKT and Mercury, the downward pressure on real prices is being negotiated successfully. Efficiency gains at Mercury, for example, added back a 2.5 point loss of profit margin from imposed price cuts.

The stock market greeted news of an underlying 11 per cent growth in earnings last year - stripping out exceptional items and currency fluctuations - with a 23p rise in Cable and Wireless shares to 777p.

The figures were at the top end of forecasts, but what really pleased analysts was a marked improvement in the company's cash-generating abilities, which have been a past bugbear.

Instead of an increased pounds 300m cash outflow there was a reduced one of pounds 235m. With the pounds 480m from the Canadian investment in Mercury under its belt, gearing fell from 26 per cent to 13 per cent. A significantly reduced outflow is forecast for 1993/4.

The key point is less the prospect of double digit earnings growth than whether Cable and Wireless can invest its improved cash flow wisely. Mercury PCN, or 'one2one' as it has been renamed, and Optus in Australia, are two start-ups. PCN could absorb pounds 200m to pounds 300m and may not break even for a few years.

A p/e of 16.5 assuming pre-tax profits top pounds 1bn this year is not a high price for secure earnings growth. Meanwhile the BT/MCI deal is leading some to talk of a break-up worth more than 900p.