Asian Stock Focus: HK's PCCW Needs More Than Cost Cuts
January 24, 2002
Dow Jones Newswires
By ANETTE JONSSON
Of DOW JONES NEWSWIRES
HONG KONG -- While Pacific Century CyberWorks Ltd. (PCW) has received applause for its debt refinancing deals and other cost-cutting measures in the past few months, investors remain wary of the stock and most analysts aren't recommending it.
Cash flow preservation does put the company on the right track, they agree, but in order for PCCW's battered share price to embark on a more sustainable recovery, the Hong Kong telecommunications and Internet service provider needs to show real improvement in revenue and bottom-line growth.
A majority of analysts give the stock a "hold," "neutral" or "market perform" rating, which is hardly inspiring for a stock that is down more than 90% from its February 2001 peak.
Target prices for the most part range from HK$1.80 to HK$2.80 a share, compared to Thursday's close of HK$2.025.
"It's not an exciting story to buy. To me the price has already discounted the various improvements in the past few months," said one analyst at a European bank.
PCCW still has a disproportionate amount of debt on its books, said the analyst, which means most of its cash flow goes toward interest payments. However, a 2001 earnings report above expectations, coupled with further cuts in interest costs, could make the company worth another look, the analyst said.
Some local fund managers, who have been heavily underweight the stock in the past year, have similar thoughts.
"I quite like it, but to move convincingly we need to see an improvement in underlying revenues," said one manager of a Hong Kong fund which holds "some" PCCW shares. "The swing factor is interest payments, but the most pressing point is where growth is going to come from," he said.
One problem for PCCW is that its operations with growth potential such as broadband provision, systems integration, data centers and Internet services are still very small compared to its fixed-line business which makes up the bulk of its revenue. And so a short-term boost to the bottom line is unlikely.
Speculators also are hoping that the company will be able to enhance its value by identifying growth opportunities in China, but that is "by no means a certainty," an analyst with a U.S. bank said.
Internet Operations Still Showing A Loss
Meanwhile, the Internet operations, recently revamped to focus more specifically on the Hong Kong market, are still showing a loss, although the company has pledged to limit this to US$190 million in 2001 and US$100 million in 2002 and 2003 combined.
According to Multex Global Estimates, analysts on average expect PCCW to report 2001 earnings before interest, tax, depreciation and amortization of HK$7.18 billion and a net profit of HK$1.79 billion, or 8 HK cents a share. This is up from an EBITDA of HK$520 million and a net loss of HK$6.91 billion in 2000.
Analysts also cite the company' high valuation multiples compared with its peers as a reason why they can't recommend the stock. In a research note, Deutsche Bank AG's Nigel Coe said that at 10.9 times forecast 2002 EBITDA, PCCW is trading at the upper end of the range for global incumbent telecommunications operators, which means the market "cannot award any credit for a more stable debt outlook."
Breaking with the trend, Jack Tsui at South China Brokerage has a "strong buy" rating on PCCW and a 12-month target price of HK$3.20.
Through its 50%-owned international backbone unit Reach, PCCW should be able to capture a significant portion of the anticipated increase in telecom traffic going into China, Tsui said. He added that a potential listing of Reach later this year as well as anticipated layoffs of another 750 staff should also help boost the share price.
PCCW also has a strong foothold in the domestic market, which Tsui doesn't expect to be under threat any time soon despite a full liberalization of the fixed-line market in 2003.
Dao Heng Securities too is recommending investors buy the stock if it dips below HK$2 again, although mainly as a trading play which should yield gains on a 12-month horizon.
A convertible bond issue by PCCW last week has resulted in a lot of short-selling, largely for hedging purposes, sending the stock 9% lower in the past five sessions, and Dao Heng suggests investors take advantage of this price weakness.
Before the most recent dip - which is generally expected to be only short-term - PCCW's share price had gained almost 40% after it hit a record low of HK$1.61 on Sept. 4. In this period the company has lined up three successful bond issues, replaced a high-cost content contract and trimmed its wage costs by laying off 506 employees.
Swift Execution Of Bond Issues Surprises Market
The bond issues in particular have surprised many in the market by their swift execution, especially after tough market conditions and investor demand for high yields in June forced the company to scrap a planned bond issue at the last minute, an issue that was initially to be one of the largest U.S. dollar bonds ever in Asia.
PCCW's recent bonds - 30 trillion yen of 30-year Eurobonds, US$1 billion of 10-year global bonds and last week's US$450 million of five-year convertible bonds - have allowed PCCW to refinance part of its US$4.7 billion term loan, swapping floating-rate interest for more certain fixed-rate coupons.
But what is more important is that the company has lengthened the maturity of the debt beyond 2004 when the now refinanced US$1.5 billion three-year tranche of the term loan was due, avoiding a potential cash crunch in the next few years.
Proceeds from the yen bonds and last week's convertible bonds are expected to go toward the refinancing of a US$2.3 billion tranche of the term loan due in 2006.
PCCW declined to comment on how much of the term loan is now outstanding, but the group's chief financial officer, David Prince, said the company has paid down US$500 million from internal resources.
This is less than most analysts' estimates that half of the US$1.5 billion three-year tranche would have been prepaid.
This, they say, should have reduced the total debt held by PCCW-HKT, the fixed-line unit which took out the term loan and guaranteed the euroyen and U.S. dollar bonds, to about US$4 billion by the end of 2001. That in turn should mean that the debt to EBITDA ratio has fallen below a crucial threshold of 3.5 times, which will allow a transfer of 75% of PCCW-HKT's profits to the parent company in the form of dividends, several analysts believe.
PCCW's Prince declined to confirm this, saying only that "after all the recent transactions, our debt position has decreased."
"Overall we are lowering average cost of our long-term debt by taking advantage of the current market conditions, i.e. low interest costs and liquidity," he added in his written response.
"This is quite significant," said the U.S. bank analyst of the potential breach of the 3.5 times debt to EBITDA trigger. "It would increase the financial flexibility and means that the cash flow from the telecom operations can be used for investments into other growth businesses and forays into China," he said.
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
--------------------------------------------------------------------------------
URL for this Article:
interactive.wsj.com
--------------------------------------------------------------------------------
Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws.
For information about subscribing, go to wsj.com
Used with permission of wsj.com |
