Australia's Telstra 1H Net Tipped To Grow 5% >TLS
By Graham Morgan
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--Australia's most profitable company, Telstra Corp. (TLS), is expected to reveal Wednesday that first half earnings growth slowed to just over 5%, and remains on track for another annual result easily above A$4 billion.
Chief Executive Ziggy Switkowski late November tipped 5-6% revenue growth in the 2000-01 fiscal year and local analysts believe this estimate is about right.
The much-publicized Asian asset merger with Richard Li's Pacific Century Cyberworks Ltd. (H.PCW) isn't expected to feature in the earnings because the deal was finalized in February - well into the second half of Telstra's fiscal year ending June 30.
A Dow Jones survey of 10 telecommunications analysts indicates they anticipate, on average, Telstra's six-month net profit will be close to A$2.11 billion after abnormal items and any asset sales. This compares to A$2.02 billion in the first half of 1999-00.
Telstra will report a much higher bottom-line profit of around A$2.78 billion, according to the survey, but that is before A$725 million of superannuation, or pension, writebacks and other sundries are stripped out.
The company's traditional revenue engines of fixed-line, long-distance and international calls will deliver the lion's share of profits, while high technology operations like data services, are likely to make sizable contributions.
"People will be watching for revenue trends across business sectors, there should be some growth in mobile and data services," said Andrew Hines, senior telecommunications analyst at ABN Amro.
Hines is recommending to his clients they buy Telstra shares.
Although the growth in new-age businesses will easily outstrip traditional businesses in percentage terms, mobile growth numbers are likely to flatten, coming off the peak in 1999, another analyst noted.
But there could be a surprise from Telstra's international telephony business because prices have stabilized and are beginning to show some upside. International calls added just under A$1 billion to sales in 1999-00.
In the broader market, brokers and investors will be focussing on cost savings, which will underpin Telstra's bottom-line earnings, because Switkowski has promised up to A$650 million in savings by the end of the financial year.
Analysts Want To Hear About Cost Savings, Asia Ops
Any hint that Telstra is approaching or poised to surpass this target would likely prompt a short rally in the shares, as long as the earnings don't surprise the market.
Last Thursday, Telstra's shares rallied 2.4% after the company announced it had signed a A$500 million outsourcing contract with computer services giant Electronic Data Systems Corp. (EDS).
Telstra will handover the maintenance and development of its billing services to EDS for the next five years, a move welcomed by brokers who expect to see significant cost savings from Telstra as a result.
Asset sales may be announced in tandem with the results too, but analysts aren't keen to speculate on the size of potential sales.
Telstra's construction arm Network Design and Construction, or NDC, is on the auction block with a price tag of at least A$300 million but buyers have been thin on the ground.
"We know they want to sell it (NDC) but there hasn't been an avalanche of buyers that we know of," said Scott Marshall, analyst at Shaw Stockbroking.
In August, Switkowski said he expected to complete the sale by the end of 2000. At the time, Switkowski hadn't decided how to sell NDC, saying a trade sale or an initial public offering were both potential avenues.
Analysts tipped Australian construction firm Leighton Holdings Ltd. (A.LEI) as the main suitor for NDC, because it would fit well with Leighton's existing operations.
But Leighton Chief Executive Wal King recently distanced himself from the sale, suggesting the price tag is too expensive, even though Leighton once made an indicative offer for the business.
Asian operations, although a hot item in Telstra's future strategy, aren't anticipated to feature significantly in the first half results, contributing less than 5% to the bottom line.
Nevertheless, analysts say they will be asking Switkowski about revenue and the mooted initial public offerings of Telstra's mobile communications and Internet infrastructure joint ventures with Pacific Century Cyberworks of Hong Kong.
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