Market applauds Telecom Q2 result, but analysts hesitant

By NZPA

Tuesday 4th February 2003

The sharemarket applauded a sturdy second quarter result from Telecom today but experts were left still dubious about revenue growth, particularly in Australia.

Telecom shares spiked as much as 13c to $4.58, closing on $4.53 after the country's largest listed company announced a second quarter net profit of $155 million.

That was a 3.7 percent drop from the same period a year before but better than average expectations of about $148 million. It was also a 0.6 percent improvement when the previous year's one-off gains were taken into account.

UBS Warburg analyst Paul Richardson noted the company had earlier guided expectations down and then produced a slightly better result.

"It was not much better than we were expecting and the key concerns were revenues in New Zealand are still declining in the Wireline (fixed network) side."

Revenues across the group (in non-adjusted terms) fell 9.7 percent for the quarter, costs improved by 14 percent and earnings before interest, tax, depreciation and amortisation (ebitda) fell by 3 percent.

On a half year basis, revenue fell 8.4 percent, expenses were cut by 13 percent and ebitda fell 1.2 percent compared to the previous year.

The company declared an unchanged, fully imputed dividend of 5cps.

Telecom blamed the drop in revenues on falling income from international calling and from its troublesome Australian arm.

Since it bought Australia's number 3 phone company AAPT in 2000 for $2.2 billion, fierce competition from rivals such as Telstra has forced Telecom to cut prices and abandon its least profitable customers.

In the first six months of the year, ebitda in the Australian consumer business fell 29 percent to $NZ27 million. Revenue dropped by 26 percent and costs by a similar amount.

The Australian business and Internet division saw ebitda rise by 76 percent to $51 million, revenues drop by 9.1 percent and costs fall by 14.8 percent.

However, analysts said the market had taken heart from the fact that faster-than-expected debt reduction and stringent cost-cutting had seen Australian cashflow return to the black.

Australian cashflow was $42 million while a year ago that figure was negative $50 million, chief executive Theresa Gattung said today.

"We do expect revenues, particularly on the business side of Australia, to improve, looking into the second half of this year, but we still think there are better cost benefits to come out which will largely drive the ebitda margin improvement in the second half."

But Mr Richardson said the consumer side in Australia was still expected to keep overall revenues static.

In New Zealand, operating earnings were still strong but it was facing increasing competition in its fixed line services through regulation and the move to wireless technology, he said.

"The areas which are fast growing within Internet and data are being offset by the slow growth areas, so overall you don't have much in the way of revenue growth, despite a reasonably strong economy.

"The company's been very good at cutting costs and technology allows them to do that but... the issue we have in recommending the stock, can we actually see some strong growth... rather than just growth from cost cutting."

UBS Warburg has put Telecom on a "neutral" or hold weighting with a 12-month share price forecast of $5.15.

John Norling of Alliance Capital Management NZ agreed Telecom's cost cutting approach was of concern, particularly after the company announced today that it would spend less on capital expenditure (capex) this year than forecast.

"Future profits require a certain amount of capital expenditure to make them happen. If you don't invest, that calls into question future profits."

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