Telecom expected to be treading water in Q2

By NZPA

Friday 31st January 2003

Telecom is expected to post a slight fall in second quarter net profit when it announces its first half result on Tuesday, but analysts say it must be viewed against abnormal items enjoyed last year.

A Dow Jones poll of analysts put the average net profit forecast was $148 million, an 8 percent fall on the corresponding quarter last year, and virtually flat with the $146 million Telecom made in its first quarter.

"I don't think there's going to be that much of a difference from the first quarter," UBS Warburg's Paul Richardson said, referring to the earnings and revenue.

Net earnings before interest, tax, depreciation and amortisation (ebitda) were expected to ease to $540 million, down from $564 million the year before.

But if abnormals were stripped from last year's second quarter earnings, analysts said this year's figures would show an improvement.

Last year's result was boosted by a $13 million gain from a leasing arrangement, and payments from Vodafone in Australia.

Stephen Wood, Sydney-based analyst at Goldman Sachs, estimated one time gains inflated the 2001 second quarter result by a net $32 million.

One analyst who declined to be named said Telecom was "treading water" in the near term, although the second half was looking healthier.

"It depends on so many events," he said, including the regulatory environment facing Telecom's main earner, the New Zealand operations.

Cost cutting, improvements in mobile revenue and the lagged effects of raised residential line charges were more likely to show up in the second half.

The analyst believed Telecom was still on track for its full year target profit, which he estimated would be around $688 million.

Telecom has said it is comfortably placed to reach a full year net profit within analysts' range of $676 million to $760 million.

The company's major revenue drainer has been the restructuring of its Australian operations.

Telephone services reseller AAPT is shifting from volume growth to big, high value customers, which eroded its first quarter revenues significantly.

Analysts expect to see an improvement in AAPT's turnover in the second half. For the second quarter, Australian ebitda was expected at a modest $40 million, almost unchanged from the $38 million in the first quarter but lower from $49 million in the year-ago period.

Australian revenues were expected to be down around $405 million from $498 million the previous year.

Telecom's overall aim is to reduce debt throughout the group and keep a tight rein on capital expenditure and costs.

Capital expenditure was cut by 46 percent to $76 million in the first quarter, and Telecom is predicting capital expenditure at $730 million in the current financial year, down from a previous forecast of $780 million.

Mr Wood anticipates on-year group revenue to have fallen 6.4 percent to $1.35 billion, just ahead of consensus estimates of $1.31 billion.

Another factor being priced in by analysts is the potential for Telecom to lost some of its market share in New Zealand as a result of new telecommunication rules.

The Telecommunications Commissioner has already ruled against Telecom on interconnection fees -- although this is under appeal -- and is due to make more influential decisions this year on wholesale prices and opening up the fixed line network.

Nervousness about the new regime is given as one factor in Telecom's weakening share price, which plunged to $4.35 in December. That was the lowest since October 2001, when the stock hit levels at an eight-year low. The stock fell 6 cents today to $4.41.

"We are also starting to see some of the impact of the new regulation in New Zealand in terms of the low interconnection (charges) and pressure on pricing as well," said Forsyth Barr analyst Jeremy Simpson.

One ray of hope was a recent international survey of Western telecommunications companies. The British IR Group found although all the surveyed companies bar Japan's NTT had negative returns in 2002, Telecom's was the smallest loss at negative 5.4 percent.

Returns were measured by stock price movement and dividends paid.

Comments from our readers

No comments yet