Telecom slashes earnings forecast for 2011-2013

UPDATE: Telecom has confirmed its trading halt was in relation to a profit warning.A press conference at 4pm will reveal more details. One industry source told NBR that it is likely the company will also announce a wave of redundancies. On April 13, Telecom eliminated 31 positions at its Australian subsidiary AAPT, moving the roles to a contractor in Manila.

UPDATE: Telecom has confirmed its trading halt was in relation to a profit warning.

A press conference at 4pm will reveal more details. One industry source told NBR that it is likely the company will also announce a wave of redundancies. On April 13, Telecom eliminated 31 positions at its Australian subsidiary AAPT, moving the roles to a contractor in Manila.

The source told NBR that regulation would be blamed for the job losses, thought to be up to 200 in management positions. [UPDATE: Telecom to cut 200 management jobs]

Asked about the redundancy rumour, a Telecom rep would only say that Telecom has no comment on anything related to the announcement until chief executive Paul Reynolds hosts a call for analysts and media at 4pm.

Telecom shares (NZX: TEL), already trading at close to the bottom of their 52-week range,  fell 4% in the minutes after the halt was lifted at 1.35pm but stabilised to end the session down 2.68% or 6% to $2.18.

AAPT, Crown Fibre
Telecom said its revised ebitda guidance (see table below) "assumes the retention of AAPT" and "does not reflect the the impact of the government's ultrafast broadband (UFB) initiative, which is likely to reshape the industry".

ABOVE: Telecom is maintaining its 2010 ebitda guidance of -1% to 2% over 2009's $1.68 billion, or $1.77 billion adjusted for impairments (now expected to be at the bottom of that range; net profit guidance is $400 million to $440 million). Ebitda will rise in 2011, but be around $100 million less than expected, and 2012 and 2013 growth will be less than expected. Not factored in: the potentially huge impact of the government's Crown fibre project.

Dr Reynolds pinned the profit warning on the recent, unfavourable changes to the Telecommunications Service Obligation (TSO) - dubbed Telecom's gravy train by one analyst". From 2011, all telcos will pay into a contestable fund rather than pay money directly to Telecom for servicing rural customers and the related rural broadband initiative.

Telecom has previously said the TSO changes will effect ebitda by the tune of $56 million a year.

A softer revenue outlook was blamed on:
- Lower mobile revenue growth
- Price pressures in voice and data markets; and
- Flow on impacts of the economic downturn

Telecom expects Capital Expenditure to reduce from $1.1 to $1.2 billion in FY10 to $1.0 to $1.1 billion in FY11. 

“We are highly focused on how we position Telecom for a UFB world and the implications for this on Telecom’s regulatory undertakings which are designed for a copper, not fibre world” said Dr Reynolds.

“We are open to working with the government on a full range of approaches to its UFB initiative."

Telecom shares (NZX: TEL) have been in a trading halt since 10.07am, pending a material announcement by the company.

A notice from Telecom to the ASX, where the company also listed (ASX: TEL), states the company will cease trading for a period of approximately two hours ahead of a "materially price sensitive announcement in relation to financial forecasts."

Notably, the disclosure to the ASX is more detailed than its NZX equivalent.

Craigs Investment Partners analyst Geoff Zame thought a profit-warning was possible, given that Telecom should know its third-quarter result by now (it will officially report May 7), but that the length of the trading halt seemed to mitigate against that, or the sale of Telecom's Australian subsidiary AAPT, which has been speculated on by the AFR.

"[The delay] suggests it is something external/reactionary rather than internal, but who knows," said Mr Zame.

Asked if the trading halt could be related to a possible spin-off of Telecom's Chorus division ahead of a Crown Fibre deal, Mr Zame said "that can't be discounted". (Crown Fibre Holdings recently drew up its preliminary shortlist).

The company's shares were trading up 1c (or 0.45%) immediately before the halt.

NZ First Capital analyst Greg Main speculated to NBR that the halt could be related to the sale of AAPT.

This week, the AFR's Street Talk column has reported that Telecom has retained Goldman Sachs JB Were to parse a private equity for AAPT.

The halt also occurs against the background of Telecom's first "accounting separation" results being released by the Commerce Commission (see end of story).

Telecom would not comment.

The opposite is also possible: that Telecom will announce bad news related to the government's $1.5 billion ultrafast broadband project. Or, some kind of compromise deal.

READ ALSO: Telecom's financial statements raise issues

What AAPT could be worth
Telecom puts the book value of AAPT at above $A500 million.

Earlier this week, Forsyth Barr analyst Guy Hallwright told NBR, "We have $NZ400 million as a valuation (for AAPT), so that or better would look good to us."

Craigs Investment Partners Geoff Zame offered: "A good price is 4x ebitda of approximately $A100million, or about $A400 million." 

Mr Zame added that a sale would be good for investor sentiment but was unlikely to make a material difference to Telecom's valuation.

Market analyst Paul Budde told NBR: "I think we have been talking about this [AAPT's sale] for well over five years, so it is about time that Telecom made a decision.

"Over that period the price only has come down for them. I think they started talking about $A1.5 billion and that dwindled down to something around $A300 million, which was at that time unacceptable to Telecom.

What AAPT cost
Telecom bought Pacnet in 1999 at the height of the dot com boom for $NZ2.2 billion - and bolstered it with its $A357 million purchase of PowerTel in 2007.

"I don't think the value has gone up much since that time. Their customer base value is not of such a value that this would warrant a premium. Their network is still a valuable asset but it is aging and the NBN [national broadband network] is around the corner so it will be interested if they will except something like this, this time around."

When similar rumours surfaced in December 2008, Pacnet – a wholesale bandwidth specialist controlled by private equity backers – confirmed it had bid for AAPT (widely thought be $420 million). Telecom, which would not comment, was said to have decided it was better off waiting for the recession to lift.

Mr Budde considers that after a series of mergers, the Australian telecommunications market is all about scale. Telecom doesn't have it, and is better off cashing in its chips.

Other Aussie assets that could be on the block
Telecom's Australian assets also include a 5% stake in Vodafone Hutchison Australia (trading as Vodafone Australia) valued at $202 million, and a 17.4% stake in ISP iiNet valued at $A13.3 million.

The iiNet stake came about after Telecom bought PowerTel, part owner of the bad-boy ISP, and rolled it into AAPT.

The Vodafone Hutchison Australia stake is something of an accident of history. Telecom originally bought a 10% stake in Hutchison –which came with a board seat – in a (never realised) effort to tap the Hong Kong company's 3G expertise and buying power.

Telecom spent $A400 milllion to acquire its Hutchison stake in 2001.

Accounting separation
Separately, this morning the Commerce Commission published its summary and analysis of Telecom’s first regulatory financial statements for the financial year ending 30 June 2009.

Under requirements issued by the Commission under Part 2B of the Telecommunications Act 2001, Telecom must publish financial and other information about its network, wholesale and retail business activities and services - so-called accounting separation.

The commission said this is designed to provide useful information to industry stakeholders about the operation and behaviour of Telecom.

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