Telecom officials out to defend Australian buy

Friday 27th July 2001

By Rob Hosking

Telecom executives are expected to move to allay growing concerns about the company's Australian strategy when it announces its annual result in just over two weeks' time.

The company is expected to announce a profit in the range of $794-842 million - a figure that includes about $220 million from Telecom's 50% stake in the Southern Cross cable.

The company's share price has fallen, along with other international telecommunications stocks, since the middle of last year and is now about half what it was in early 2000.

But not all that fall is due to investors taking an increasingly jaundiced attitude to telecommunications stocks.

"I think there is more concern about the company's performance in Australia," JP Morgan equities analyst David Wallace said. "It's a very tough market. Despite the fact that its got three times the revenue and twice the number of customers, the margins are very tight."

Last week AMP Henderson's senior equity portfolio manager, Craig Brown, suggested Telecom had paid too much for Australian operation AAPT.

Other analysts echoed that sentiment this week, although Mr Wallace added there was a bit of 20-20 hindsight in that view.

"You pay what you think it is worth at the time, and back then it was worth what they paid for it."

Another analyst said few would question the strategic worth of the investment but that with plunging telecommunications valuations the price now looked dubious.

"The market was growing 20-30% two years ago. Now its probably somewhere in the mid-teens. Whether that's a cyclical issue or whether there are issues in the telecommunications sector itself is something that is still not clear."

Much of Telecom's investment, both in New Zealand and Australia, has been in new technologies, particularly in the mobile sector, with its roll out of the CDMA network earlier this month and the investment in spectrum for third-generation mobile networks.

Telecom is not alone in this extensive capital investment - the other carriers have made similar large outlays to fund broadband technologies, whether on mobile or fixed lines.

Vodafone is trialing GPRS, which will upgrade its GSM network and, like Telecom's CDMA network, allow the transfer of large data files over mobile handsets.

The service was to start earlier in the year but delays in getting the handsets meant it was postponed.

But take-up for the new technologies has been slow, both here and overseas. CDMA has been on offer in Australia for well over a year from Telstra and Hutchison. Telecom recently canned the AAPT CDMA roll out and linked up with Hutchison to deliver broadband services over the mobile network.

However, only 5% of the potential market has signed up after 18 months, according to a recent Yankee Group report.

It is not uncommon in the telecommunications market for carriers to be overoptimistic about customer take-up of new technologies - for several years in the mid-1990s it was a standing joke that ISDN stood for "I still don't need it."

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