Telecom launches $300M buyback as earnings growth stalls

Friday 24th February 2012

Telecom New Zealand has announced its first results since last November’s demerger from Chorus, its former infrastructure arm, giving a glimpse of the future and seeking to return up to $300 million to investors through share buybacks this year.

The earnings announcement for the six months to Dec. 31 is complex because it includes five months’ trading from Chorus.

However, at its most fundamental, the company says earnings before interest, tax, amortisation and depreciation for the first six months of the year was $488 million, just $1 million higher than for the same period a year earlier.

Guidance for the second half of the year puts EBITDA at $560 million for continuing operations. The company announced a 9 cents-per-share fully imputed dividend on the result.

Net profit after tax for the first six months was $240 million, shorn of one-off book entry gains relating to the Chorus demerger, but including five months’ trading results for Chorus.

Guidance for the second half of the financial year is for NPAT of between $160 million and $190 million, reflecting the fact that the NPAT figures included Chorus trading results in the first half, but won’t in the second half.

Capital expenditure in the second half is forecast at $190 million to $220 million, compared with $325 million in the first half.

Chief executive Paul Reynolds said the company can manage an on-market buyback of up to $300 million of surplus capital “while maintaining a net-debt-to-EBITDA ratio of less than 1.1 times” and remains committed to maintaining A-band credit ratings.

Prior to adjustments for Chorus, and bearing in mind that only five months of Chorus trading are in the six months under review, total EBITDA was $1.7 billion and NPAT came in at $1 billion.

One-off items in the EBITDA figure from the Chorus demerger were a non-cash gain based on revaluation of the Chorus assets at break-up of $863 million, a $28 million non-cash reclassification from a simplified corporate structure.

There was also $110 million of debt restructuring costs, and $47 million of costs relating to achieving the demerger, which Reynolds said would allow the company to compete “on a similar footing to its competitors, due to the reduced impact of regulation on the new industry structure.”

The Chorus demerger allowed the infrastructure business to participate in the government’s subsidised national ultra-fast broadband initiative and freed the demerged Telecom to become a retail telecommunications services business facing far less regulation than when it also owned most of the national telecommunications network.

Beneath the complexity of the results, Reynolds said Telecom was achieving “ongoing operational improvement” and reported increases in post-paid mobile phone and data revenue, increased broadband connections, and a 40 percent reduction in operating costs from restructuring its international voice calling business.

“A new commercial New Zealand wholesale business has been set up which has a much lower operating cost base and a greater focus on future commercial wholesale services,” said Nick Clark, general manager of Telecom’s wholesale and international segments.

New Zealand mobile revenues rose 12 percent compared to the same period a year earlier, “primarily due to an increase in in device revenues relating to a change in subsidy and accounting,” said Reynolds.

Average revenue per user grew by 9 percent, driven by strong growth in data sales. Post-paid connections rose 27,000 over the half due to strong Android and iPhone sales. While some 92,000 pre-paid customers had been lost, there had been little revenue impact since many of these were occasional users with phones connected to the CDMA network, which will be phased out by June.

Telecom still has 639,000 CDMA customers, representing 11 percent of mobile revenues, with the company continuing to offer switching options for those customers.

Broadband revenue rose 5 percent during the half under review, driven by 7,000 new connections and a 2 percent increase in ARPU, while EBITDA from the company’s IT services arm, Gen-I, was up 27%, reflecting declining costs and improved service delivery, said Reynolds.

The retail segment absorbed $27 million in increased mobile sales costs, leading to a 3 percent reduction in EBITDA, while sale of the consumer segment of its Australian business, AAPT, and tough trading conditions in Australia contributed to lower total retail and AAPT EBITDA.

BusinessDesk.co.nz

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