Investment Write-Downs To Push PCCW Fiscal Year Earnings Into Red
March 27, 2001 2:56 AM
By Anette Jonsson
Of DOW JONES NEWSWIRES
HONG KONG -(Dow Jones)- Its crumbling share price may leave much to be desired, but it is the decline in value of its investments in other companies that will push Pacific Century CyberWorks Ltd.'s (PCW) full-year earnings firmly into the red, analysts say.
The release Wednesday will be PCCW's first earnings report after the merger with Hong Kong's largest telecom operator in August last year, and the added operations will send revenues ballooning to between HK$12 billion and HK$15 billion compared with the meager income of HK$131 million it had as a startup in the Internet arena a year ago.
But the merger with Cable & Wireless HKT will also result in some hefty charges in the form of advisory fees as well as interest costs on a US$9 billion loan taken out to finance the deal. These will depress the bottom line by up to HK$1 billion each, analysts project.
On a core basis, projections range from a net profit of HK$1.2 billion to a loss of HK$2 billion, according to six analysts polled by Dow Jones Newswires, with the consensus advocating a small profit of HK$143.2 million.
But it doesn't end there.
PCCW's relentless investments into Internet-related companies in the second half of 1999 and in early 2000 has left it with stakes in 52 companies. Many of these have seen their value eroded as a result of the broad-based shakeout among Internet and technology stocks in the past year, and PCCW will have to make a corresponding adjustment on its books, analysts say.
Most Analysts Expect Goodwill To Be Written Off
Because only 10 of the companies are listed it is a little tricky to calculate the impact, they say, and write-down estimates range from HK$1 billion to HK$4.3 billion.
This will push the average forecast for last year's earnings to a net loss of HK$2.27 billion, compared with a net profit of HK$346.8 million in 1999 before the HKT takeover.
"I believe they will take the chance to be conservative and write off as much as possible," said Colin McCallum, who follows PCCW for HSBC Securities and forecasts a write-off somewhere between HK$2.3 billion and HK$4.3 billion.
Some flexibility is possible as investments that are considered long-term don't have to be booked at market prices.
In addition, there is an outside chance that PCCW will decide to capitalize the goodwill of around HK$188 million that it incurred from the HKT takeover and amortize it over the longer term. If so, this could take another big chunk off the bottom line. Most analysts, however, seem to believe PCCW will opt to write this off against shareholders equity instead, even if this means it will be left with a negative equity for 2000.
"If they choose to amortize it will depress earnings for the next 15-20 years," said ABN Amro's Jahanzeb Naseer, who expects PCCW will write it off. However, he also believes the company will adjust down the value of the assets it bought from HKT, thus reducing the goodwill write-off somewhat.
While the wide forecast range seemingly leaves plenty of room for the share price to go up as well as down following the report, analysts argue that the figures themselves won't matter that much.
PCCW's share is currently hovering 87% below its mid-February 2000 peak of HK$27.859, pressured by among other things a sketchy outlook for the company's broadband multimedia services and a large stock overhang.
The important thing for the market, said HSBC's McCallum, is whether the battered company can unveil a credible strategy with regard to its various operations and at a later stage show that it can execute it.
Specifically, analysts are keen to see whether the capital spending plan for its Network of the World (NOW) remains intact or whether it has been scaled back further. In December PCCW executives said the company plans to invest US$200 million per year in NOW in the next five years, which is down from an original capex plan of US$1.5 billion.
NOW is intended to be a link between Internet and television by offering broadband multimedia content as an integrated part of television programming.
News On C&W Stake Sale Not Expected Yet
It will also be important to see how the connectivity wholesale business is doing, analysts say, since this is the unit which is believed to have the highest growth potential. After the end of the 2000 fiscal year, these operations have been merged with the equivalent businesses of Australian telecom operator Telstra Corp. (TLS) in a 50-50 joint venture named Reach.
Meanwhile, PCCW is unlikely to have a ready solution to the pending sale of the 15.3% stake that Cable & Wireless PLC (CWP) is sitting on after the sale of its controlling stake in HKT, analysts said. The U.K. telecom operator has been allowed to sell half its share since a lockup period expired in February, but has so far failed to find a buyer.
A renewed effort is likely after the earnings are out, analysts believe, and that will keep PCCW's share price under pressure. At the midday break Tuesday the stock was up 10 HK cents at HK$3.55.
While you can expect some relief once the earnings are out, given that one of the major uncertainties will be out of the way, the stock overhang will counter that, said Bertrand Chui, who follows PCCW for Worldsec International.
"I do believe the share price will be very volatile after the (results) announcement," he said. Based on valuation PCCW is cheap at the moment, however, since its Hong Kong network alone is worth more than its present market capitalization of around HK$78 billion.
Chui retains a target price of around HK$4.90 on the stock for the time being, but others are less optimistic.
"I think it will break the HK$3 barrier. It's difficult to say when, but probably in the next three to four months," said ABN Amro's Naseer, again citing the pending sale by Cable & Wireless as a reason.
The 2000 earnings will be released after the market closes Wednesday.
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
-0- 27/03/01 07-42G
(This story was originally published by Dow Jones Newswires)
Copyright (c) 2001 Dow Jones & Company, Inc.
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