WSJ - Analysts Tip Record Pft For Telstra Despite Rev Slowdown
August 24, 2001
Dow Jones Newswires
By GRAHAM MORGAN
Of DOW JONES NEWSWIRES
SYDNEY -- Telstra Corp. (TLS), Australia's dominant telecommunications company, is forecast to report the country's largest ever corporate profit Wednesday, but analysts expect the accounts to reveal deteriorating revenue growth and downward re-evaluations of its Asia-Pacific joint ventures with Hong Kong's Pacific Century CyberWorks Ltd. (PCW).
When one-off significant items are included - and there's going to be some big ones related to the Asian ventures - seven analysts surveyed by Dow Jones Newswires expect on average that Telstra will report net profit of A$4.04 billion, up from A$3.68 billion last year.
But excluding one-off items, they expect a net profit of A$3.86 billion, down around 3.5% from last year. The forecasts were in a range between A$3.51 billion and A$4.08 billion.
The data suggest that the mix of one-off gains and losses will generate a net A$230 million, although the company has so far flagged that one-off gains will roughly offset one-off losses.
Chief Executive Officer Ziggy Switkowski warned the market in June that revenue growth had all but dried up in the second half of the 2000-01 fiscal year, paring back his previous forecast of 5%-6% growth for the full year made at Telstra's annual general meeting in November.
"The first half revenue growth was about 5%, the second half revenue growth appears to be closer to 1%, and given Telstra is three quarters of the industry, this suggests the growth trajectory of the industry as a whole is going through a phase," Switkowski warned in June.
Analysts expect revenue to climb to around A$19.41 billion, up 4% from A$18.61 billion last year. The responses to the survey were in a narrow range between A$19.24 billion and A$19.56 billion.
Analysts Expect One-off Items Relating to Asia JVs
The earnings and revenue numbers themselves are unlikely to surprise the market, so analysts will be focusing on the mix of one-off items, cost-cutting initiatives and any forward-looking statements.
"So much guidance has been given, we just want to see that the figures are delivered," said Richard Long, telecommunications analyst at Deutsche Bank.
The largest one-off items will relate to Telstra's two pan-Asian joint ventures with Pacific Century CyberWorks.
Telstra is expected to reduce its previous valuations on its shares in both Reach, an Internet infrastructure company, and Regional Wireless Co., which owns the mobile assets of Hong Kong Telecom via holding company CSL. Telstra owns 50% of Reach and 60% of RWC, while PCCW holds the remaining stakes in both companies.
Analysts expect Telstra to revise the value of Reach down to around US$4 billion, from US$6.5 billion previously, and the value of RWC down to between US$900 million and US$1.2 billion from about US$1.7 billion.
The sale of Telstra's global wholesale assets into Reach is likely to be more than offset by its writedown on its share of Regional Wireless, analyst say.
But a writeback of pension fund contributions of A$725 million - already booked in the first half of the year - and profit from its divestment of a stake in Computershare will more than offset losses related to investments in Solution 6 Holdings Ltd. (A.SOH) and Sausage Software, which was recently merged into SMS Management & Technology Ltd.
CSFB analysts think the one-off items are likely to broadly offset each other and deliver a A$280 million net abnormal after tax.
"The final result should show that Telstra's key growth drivers are under pressure. Mobile (operations are) unlikely to be a strong growth generator for the next few years, competition in business data is increasing and broadband is unlikely to be significant in the short-term," Credit Suisse First Boston said in its earnings preview released Friday.
CSFB analyst Guy Hallwright noted cost cutting will become an increasingly important profit driver for Telstra, as it is likely to see only modest growth in Australia and its Asian operations.
"I think they'll be forced to make substantial cost cuts, but I think they have shown they are committed," Hallwright said.
Positive Comments May Stimulate Stock Price
Separately, Telstra's Switkowski has suggested that the current slowdown in revenue is a "pause in trajectory prior to resuming its traditionally high levels of growth," which has led investors to expect a resumption of revenue growth in the second half of the year ending June 30, 2002.
"If Switkowski put out an upbeat statement on the second half, it could help the stock to rally," noted David Loch, analyst at Hartley Poynton.
"The numbers aren't as important as comments on how the business is tracking; the outlook is really critical, Loch added.
Telstra's shares have been in the doldrums since Switkowski's revenue warning in June.
The session before the warning, Telstra's shares closed at A$6.71, and they reached a three-year low of A$4.80 Thursday.
At 0535 GMT Friday, Telstra was up 11 cents, or 2.3%, at A$4.93 on moderate volume of 9.6 million shares. The S&P/ASX 200 index was up 28 points.
-By Graham Morgan, Dow Jones Newswires;
61-2-8235-2962; graham.morgan@dowjones.com
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