Reach expected to lose $30m
By Glenda Korporaal, Hong Kong
04feb02
TELSTRA'S Hong Kong joint venture, Reach, is in the red with expected losses of $30 million in 2001 and $200 million in the four years until the end of 2004, according to a report by broker ABN-Amro.
The report predicts that Reach, a 50-50 joint venture between Telstra and Pacific Century CyberWorks (PCCW), is under cash flow pressure this year as a result of a jump in capital expenditure requirements following its acquisition of the Asian assets of Level 3.
Reach sells capacity on its vast network of international submarine cables to other telcos.
The report indicates a significant downturn in Reach's financial position since mid-year as Reach struggles to grow in what is an increasingly competitive market with falling revenues in both voice and data transmission. In August, Telstra reported a net profit of $14 million on its half-interest in Reach, an internet backbone protocol company, for the five months since it was formed in February 2001.
The latest ABN-Amro report projects that Reach's losses will rise to almost $70 million in 2003 followed by a loss of $52 million in 2004.
It is not expected to return to profitability until 2005 when it is projected to make a mere $16 million.
The new report significantly downgrades the outlook for the revenues and earnings before interest, tax and depreciation (EBITDA) for the Hong Kong-based company from the already "subdued" revenue projections in the broker's last report issued in November 2001.
Telstra executives in Hong Kong say they are not allowed to discuss the financial situation of the ventures until the company's next half-yearly results in March.
Formed in February 2001 from the amalgamation of Telstra and PCCW's international businesses, Reach began operations with combined annual revenues of $3.8 billion and EBITDA of $1 billion.
ABN-Amro expects 2001 revenue will fall to $2.8 billion andits latest report estimates the EBITDA for 2001 will come in at about $774 million.
Deutsche Bank is also cautious about Reach's performance, predicting its EBITDA for 2001 will come in at $740 million to $760 million.
"The industry is currently struggling with an overcapacity issue and a much weaker data volume growth environment than anticipated 18 months ago," the report says.
"Reach is not immune from these issues and near-term earnings remain under pressure."
The broker predicts Reach will "emerge in a strong, competitive" position in the longer term but notes that "short to medium-term conditions remain tough".
The report notes that at the time Telstra and PCCW were first discussing their joint venture, in early 2000, internet data volumes were rising at 200 per cent a year and corporate data volumes were rising by 100 per cent a year.
"Data volume growth has now slowed to around 50 per cent a year for internet traffic with corporate data volume growth down to 20 to 25 per cent," it says.
"Those sound like good growth rates but data pricing has been falling at around 40 per cent a year.
"Internet data revenue is still growing but corporate data has stalled and even declined."
However, the report predicts Reach will be one of the long-term survivors of the industry.
It compares Reach to Qantas, which suffered in 2001 from competition from Virgin and Impulse but survived.
It also speculates Telstra and PCCW are still keen to bring in a Japanese player.
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