Tech Stock Focus: Dim Growth Prospects To Hamper PCCW
July 26, 2001
Dow Jones Newswires
By ANETTE JONSSON
Of DOW JONES NEWSWIRES
HONG KONG -- Pacific Century CyberWorks Ltd.'s (PCW) decision last week to scrap its planned bond issue sent its battered share price several notches lower still, but even then, most analysts say they aren't ready to recommend a buy on the stock.
Lack of growth prospects is one reason cited. Many of the grand visions that made PCCW one of the most sought-after issues in Hong Kong in 1999 and early 2000, including its aim to create the world's largest broadband Internet business, have been either abandoned or scaled back.
Instead, the slumping Internet market and PCCW's takeover of Hong Kong's longest-established telecommunications operator last year have forced PCCW to focus on more down-to-earth tasks like cost cutting and paying off its sizable debt.
To help finance its US$28.5 billion acquisition of Cable & Wireless HKT in August 2000, PCCW also sold parts of the former telecom monopoly to Australia's Telstra Corp. (TLS). As a result, PCCW is now increasingly looking like a traditional fixed-line operator - and this, in a mature market, analysts say.
"It's difficult at this stage to see where growth is going to come from," says Leo Tang, who tracks PCCW for ING Barings. "It will likely come partly from outside Hong Kong, but without cash flexibility and with the poor market sentiment, it's hard to see how the company can pursue growth opportunities at this point in time."
The company itself is hailing value-added services for broadband as a key source of growth going forward, but analysts note that PCCW's new strategy for this business area - outlined earlier this month - tlaks more about cost control than revenue growth.
"Without a clear strategy, we cannot make a clear valuation and cannot recommend the stock to fund managers," says an analyst at DBS Securities.
At the midday break Thursday, PCCW shares were traded at HK$1.99.
However, PCCW has said that in an effort to preserve its cash resources, it will cut back spending on loss-making Internet operations and cut costs, partly by laying off 340 staff from Aug. 20. Also, the scaled-back Internet business will focus on Hong Kong, rely on subscriber fees rather than advertising and will be buying most of its content from partnerships rather producing it in-house. Further details, including the names of its partners, will be revealed shortly.
Despite the question marks that remain, including how PCCW will differentiate itself in the competitive Hong Kong market, analysts say the company is on the right track.
As long as global Internet and telecom markets remain weak, PCCW can only really do two things: work on cost control to help EBITDA growth and get its bottom line under control; and reduce its debt by selling non-core assets, according to an industry analyst.
Bertrand Chui, a telecom analyst with Worldsec, agrees, saying: "The management needs to show better-than-expected earnings performance to regain trust from investors,"
The planned launch of a US$2.5 billion, 10-year bond issue last week was another attempt by PCCW to preserve its cash and increase its financial flexibility. It needs cash not only for expansion but also to service a US$4.7 billion syndicated loan.
During the two-week roadshow, which happened to coincide with the financial crisis in Argentina and growing discomfort with emerging market debt globally, investors started asking for a little too much interest. PCCW first scrapped plans for a 30-year tranche, then tried to cut the size of the issue, and eventually decided to pull the issue altogether.
Analysts say the decision to do so was "financially prudent," noting that PCCW is under no immediate pressure to refinance its bank debt since the first US$1.5 billion tranche doesn't expire until February 2004. However, they add that the shelved issue has further dented investor sentiment in the company.
"It's never a good thing to pull a deal," says Joe Locke, a telecom analyst with ABN Amro. "They may not have overpaid financially, but the deal shows that bond holders don't want to take the risk, so why should equity holders?"
Indeed, some decided not to. In the wake of the scrapped bond issue, PCCW's share price dipped to a new low of HK$1.97 Monday and still hovers around that level.
At this point, says one analyst, "I don't see that much downside since (the share price) has come down quite a bit and is now looking a lot more reasonable." Bu there isn't that much upside for the stock either, he says, noting mainly the lack of revenue growth and tough market environment for telecom companies.
Even though PCCW's share price has dropped more than 90% from its peak of HK$27.85 in February last year, and has fallen around 60% since the start of this year, the analyst has a neutral recommendation on the stock.
Most other analysts who spoke with Dow Jones Newswires have a target price of HK$1.90 to HK$2.60 on the stock, and similar recommendations.
On the plus side, steady cash contribution from PCCW's fixed-line operation is one reason why analysts don't think investors should sell the stock. Voon San Lai at BNP Paribas Peregrine points out this part of the business alone is worth more than HK$2 per share.
"If (the share price) drops below HK$2, it's a fantastic (buying) opportunity," says Lai, who is more upbeat on the stock, with an outperform rating and target price of HK$4.04.
Not everyone shares his view, though.
PCCW's fixed-line operation is a steady business, "but why pay a premium when you can buy something else cheaper?" says ABN Amro's Locke, who has a reduce recommendation on the stock.
In line with other regional telcos, he says, PCCW should trade around HK$1.60 to 1.70. It is now quoted at an enterprise value of 11-12 times EBITDA, compared with 6-8 times for its regional peers, he adds.
However, most analysts say this isn't the right way to look at PCCW since the company has a lot of assets that aren't showing up on the profit -and-loss account, such as its properties and numerous joint ventures.
Meantime, investors are still waiting for Chairman Richard Li to deliver on his promise to make the former Hong Kong telecom monopoly into something more than a traditional fixed-line operator. As the founder of PCCW and the youngest son of Hong Kong's leading tycoon, Li has had to face a lot of criticism in the past year from shareholders who are disappointed about the collapse in the share price.
Despite overall skepticism over any near-term upside for PCCW, some analysts note that the company's strong cash flow puts it in a better position than many other telcos.
Before acquiring C&W HKT last August, PCCW was "little more than a dream in a bubble," says BNP's Lai, but after the takeover, "it now has a substantial business from where it can grow."
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
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