Cable & Wireless Jamaica Ltd (CWJA) recently posted its third Loss in as many years, as it continues to grapple with hefty costs related to the build out of its 3G wireless network and its transformation process. So far, neither of these initiatives have achieved the sustained cost savings and increased business that is needed to re-invent the Telecom Firm into a viable entity.

CWJA’s challenges began in 2001 when the Government of Jamaica (GOJ) deregulated the mobile phone market, and consumers welcomed competition with opened arms. Not surprisingly, its revenue streams came under intense pressure and the Company made several failed attempts to regain its foothold in the market. Things appeared to be looking up however, when the Firm announced its transformation process in 2008, geared toward shedding costs and bolstering its bottom line. Unfortunately, the restructuring exercise resulted in CWJA taking on an overwhelming debt burden — weakening its financial position and resulting in back-to-back quarterly losses.

Specifically, Net Finance Costs have been on the rise since YE 2007/2008. In YE 2008/2009, Net Finance Costs rose 32.46 per cent to $2.01 billion placing the Company into a Loss for the period. Borrowing costs increased by a similar amount for the most recent fiscal year end and now stand at $2.68 billion.

In addition to staggering Net Finance Costs, the most recent financial year was also negatively impacted by a sharp rise in depreciation and amortization costs, which more than doubled to $7 billion in YE 2009/2010, from $3 billion a year earlier. According to CWJA, it incurred additional Depreciation & Amortization charges as part of a “continuing review of useful economic lives for its asset base”. Previously, in YE 2007/2008, the Firm incurred a $5.15 billion Impairment Charge related to the write-down of its mobile asset base.

The fact that CWJA has one of the weakest executive management structures of all listed Firms on the Jamaica Stock Exchange (JSE) has only made matters worse. This seems evidenced by the Company having seen six Chief Executive Officers (CEOs) come and go in the past nine years, and according to media reports none of them were able to meet the specific targets set by CWJA’s parent Company, Cable & Wireless Plc.

Despite the fact the CWJA remains inherently weak as a Company; its stock has traditionally been attractive to investors for its liquidity. Of note, CWJA has been a part of the JSE Select Index, which includes the 15 most liquid stocks on the local market, since the inception of the Index in 2000. Additionally, the fact that CWJA is a penny stock has a psychological effect on investors leading them to believe that the stock is a good buy because it is “cheap”.

However, the stock has not produced consistently attractive returns, underperforming the JSE Main Index in at least the past five years. To illustrate — if an investor had purchased 10,000 units of CWJA in on June 15, 2008, he or she would have made a negative return on investment of seven per cent. Furthermore, given the volatility in the Company’s earnings over the past five years, it has not declared a dividend payment since 2007.

CWJA has not displayed the ability to bolster its bottom line in at least the last five years primarily due to its weak executive management structure, intensified competition in the mobile market as well as the onset of the global economic recession. The Company is still associated with its previous monopolistic structure with regards to inefficiency, lack of price competitiveness and lack of customer service. Resultantly, its rebranding efforts — bMobile in 2004 and LIME in 2008 were both met with mixed reviews by the public. Moreover, many of its products have been poorly timed – for example, its Anyone World Mobile plan (which has since been eliminated), its Netspeak International calling plan, and its Prepaid Homefone product. Specifically related to its mobile business, CWJA has launched bundle packages such as the SupaPak and UltraPak, neither of which have helped it to regain its footing in the market.

However, to its merit, it still holds several key assets that are critical to its future viability. Namely, the Firm has a well-established infrastructure, most notably its fixed line and cellular towers. It has also maintained its position as Jamaica’s leading landline and broadband service provider. The onus therefore is on the Company’s leadership to build upon these strengths, offering more timely products and improving the level of service to its customers.

In the meantime, the stock is expected to continue to underperform the JSE Main Index and is recommended as a SELL. SSL urges investors to focus their attention on Companies with sound fundamentals, like Scotia Group Jamaica Ltd (SGJ), Pan-Jamaican Investment Trust Ltd (PJAM) and Jamaica Broilers Group Ltd (JBG) when making their stock picks.

Kimberly Thelwell is the Senior Investment Analyst at Stocks & Securities Ltd. You can contact her at kthelwell@sslinvest.com.