FOCUS - PCCW faces stagnant or negative growth in next few years
AFX Europe; Jul 11, 2001
BY RACHEL ARPUTHARAJOO
Pacific Century CyberWorks Ltd faces stagnant or even negative growth rates over the next few years, led by falling IDD charges and loss of market share in the fixed line business, telecommunications analysts said.
Its newly unveiled internet strategy, which sees the company severely cutting back on capital expenditure, is only expected to bring in revenue in the longer term.
Even then, given the current environment towards the internet, any contributions will be minimal compared to revenue from its fixed line operations, they said, adding that it will prove of little real help going forward.
Analysts have abandoned earlier projections that PCCW's internet business would be the company's star performer, driving growth as its fixed line business stagnates amidst growing competition in a liberalised telecommunications sector.
Most analysts are negative on the stock, recommending a sell, given the uncertain outlook for the company and lack of potential for growth in the current environment.
Dresdner Kleinwort Wassertein's Eric Tomter does not see any growth in either revenue or net profit for PCCW in the next 10 years.
In fact, he is expecting negative growth, based on the fact that PCCW's market share in the fixed line business will continue to erode and IDD rates will fall.
"Its internet strategy may (bring in revenue, profits) later in the decade and stem some of the losses (in growth) that PCCW may incur," Tomter said, forecasting that PCCW will see negative growth from 2003-2007.
The company's move to refinance via a bond issue some 4.7 bln usd of debt taken on to fund the acquisition of Hong Kong Telecom, is seen as negative as it may actually end up paying higher rates than what it is already paying.
He is calling a sell on the stock, given its negative growth outlook and the fact that it is more expensive relative to Singapore Telecommunications Ltd on an EBITDA basis.
Another telecommunications analyst with a foreign brokerage, who asked not to be named, agreed that PCCW will not see any growth in the short- to medium- term, with uncertainties in place over "when growth is actually going to come back."
"Simply put, PCCW is an overvalued stock with credibility problems. I never did think it was a good company and I never thought that internet will be the answer to its problems."
The analyst, who is calling an underperform, said he is hard pressed to value the stock.
"I just can't value it," he said.
SG Securities' telecommunications analyst Jonathan Iu is more positive.
He concedes that the current environment is not conducive for PCCW's top line growth but said there are ways the company could boost earnings.
"The internet is just not happening for them. In the short term, their growth is obviously going to be stagnant," he said, adding that the company is not being run well and needs to be made more efficient.
Iu suggested that the company undertake a costs review of its whole structure and consider "taking a knife to its head count."
PCCW has a total of 14,000 employees, of which 10,000 are in the fixed line business.
"I estimate they can take a 30 pct cut from that. They don't need that many people. Assuming they lay off 3,000 and they have an average salary of 300,000 hkd a year, PCCW will save about 1.0 bln hkd a year after providing for the layoffs," Iu said.
The figure could go as high as 1.2 bln hkd a year if medical costs and other benefits are taken into account.
"That alone would boost EPS by 40 pct and this only takes into account a 30 pct cut in staff."
Overseas telecommunications companies are undertaking major lay-offs, he said, adding that he was surprised that PCCW had not laid off more staff than the 340 announced recently.
"After all, this is a company inherited from Cable & Wireless," Iu said.
In addition, he said PCCW should seriously consider selling its property holdings. "It shouldn't really own properties. They should lease space."
As for the internet business, he said there is really nothing that PCCW could do in the short-term as "internet sentiment is bad and it will take a few years (to recover)."
On revenue growth, Iu said it all hinges on the company's broadband business.
"It will take longer to take-off due to lack of infrastructure. It is just not happening as the 'last mile' connection is not there. It will need 2-3 years to hit critical mass. That is beyond their control. They should focus on what is within their control and that is, costs," he said.
He sees stagnant growth at the revenue side but some growth on the bottom line, mainly coming from lower interest costs.
He sees revenue growing by 9.0 pct in 2002, with EPS estimated at 14 cents, rising to 20 cents the following year.
The revenue growth is likely to come from its data business, with revenue likely to be "fairly single-digit growth for the next few years."
Last year and this year, the results would be an anomaly due to interest costs, he said, forecasting a net profit of 2.2 bln hkd for PCCW for 2001 and 3.6 bln next year.
He said the outlook for its internet strategy has its uncertainties and depends on its broadband business.
"There are so many fa only expected to bring in revenue in the longer term.
Even then, given the current environment towards the internet, any contributions will be minimal compared to revenue from its fixed line operations, they said, adding that it will prove of little real help going forward.
Analysts have abandoned earlier projections that PCCW's internet business would be the company's star performer, driving growth as its fixed line business stagnates amidst growing competition in a liberalised telecommunications sector.
Most analysts are negative on the stock, recommending a sell, given the uncertain outlook for the company and lack of potential for growth in the current environment.
Dresdner Kleinwort Wassertein's Eric Tomter does not see any growth in either revenue or net profit for PCCW in the next 10 years.
In fact, he is expecting negative growth, based on the fact that PCCW's market share in the fixed line business wirvalued stock with credibility problems. I never did think it was a good company and I never thought that internet will be the answer to its problems."
The analyst, who is calling an underperform, said he is hard pressed to value the stock.
"I just can't value it," he said.
SG Securities' telecommunications analyst Jonathan Iu is more positive.
He concedes that the current environment is not conducive for PCCW's top line growth but said there are ways the company could boost earnings.
"The internet is just not happening for them. In the short term, their growth is obviously going to be stagnant," he saa year after providing for the layoffs," Iu said.
The figure could go as high as 1.2 bln hkd a year if medical costs and other benefits are taken into account.
"That alone would boost EPS by 40 pct and this only takes into account a 30 pct cut in staff."
Overseas telecommunications companies are undertaking major lay-offs, he said, adding that he was surprised that PCCW had not laid off more staff than the 340 announced recently.
"After all, this is a company inherited from Cable & Wireless," Iu said.
In addition, he said PCCW should seriously consider selling its property holdings. "It shouldn't really own properties. They should lease space."
ond their control. They should focus on what is within their control and that is, costs," he said.
He sees stagnant growth at the revenue side but some growth on the bottom line, mainly coming from lower interest costs.
He sees revenue growing by 9.0 pct in 2002, with EPS estimated at 14 cents, rising to 20 cents the following year.
The revenue growth is likely to come from its data business, with revenue likely to be "fairly single-digit growth for the next few years."
Last year and this year, the results would be an anomaly due to interest costs, he said, forecasting a net profit of 2.2 bln hkd for PCCW foZCZ** Truncated ** Communication line is Offline **.
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