Profit hope resting on AAPT

By RICHARD BRADDELL

Telecom is expected to reveal a much-reduced first-half profit this week, although analysts appear to be divided on how bad the result will be.

New Zealand's premier company was once the model of predictability, but the wide range of analysts' forecasts for Thursday's announcement gives a clear indication of the uncertainties facing it.

The forecasts, ranging between a net $290 million and $330 million, reflect the market's uncertainty over profit margins in the key mobile business, as well as the likely contribution from Australian subsidiary AAPT.

Every bit as disconcerting, analysts once accustomed to $800 million-plus annual results are now forecasting a full-year profit little better than $600 million and possibly as low as $585 million.

At those levels, Telecom's annual earnings would be in the realm of the shock slump to $581 million that it reported in 1997 - a result that prompted far-reaching restructuring and cost-cutting.

Worse still, while Telecom's 1997 result was touted as "the end of the golden weather," the chances of quick recovery then were far better than now since the profit would have been $770.5 million but for one-off writedowns and restructuring charges.

And if the market's disdain in 1997 was reflected in a slump in Telecom's share price, it is even more so now with the stock often between $1 and $2 lower than it was then.

The difference now is that Telecom is unlikely to climb out of the trough quickly because the growth strategy centred on the Australian subsidiary AAPT is not scheduled to bring in strong earnings for a couple of years.

Furthermore, analysts are concerned that while the growth strategy might be good in theory, the considerable risk that it may not come off is compounded by the uncertainty over Telecom's play for the mobile telephone business of Australia's second-ranked telco, Cable & Wireless Optus.

The three main contenders, Singapore Telecom, Telecom and Vodafone, have done only the most cursory due diligence. Initial bids were lodged a week ago and only now will in-depth studies begin.

But while the outcome of the Optus sale is still "highly fluid," as one analyst put it, Telecom's chances may well have taken a knock given the alliance between Vodafone and Hutchison.

Under the surprise agreement announced late on Thursday night, Hutchison, a tiddler with only 75,000 customers out of Australia's 10.3 million mobile users, would buy a representative half share of Vodafone's two million customers.

It would be permitted to use Vodafone's national infrastructure although it would put its own intelligent systems such as billing and enhanced services on top of that.

The rationale is that Vodafone, which would have ended up with more than half the Australian market, would be able to satisfy concerns of Australia's competition regulator because, by getting rid of half its existing customers, it would still be smaller than Telstra with about 42 per cent of the market.

If such a deal went ahead - and there are no guarantees - AAPT would be severely disadvantaged as a distant number-five player in Australia's market.

Meanwhile, the future of AAPT's network is in doubt, with AAPT and lead contractor Lucent Technologies agreeing before Christmas to suspend construction.

While most analysts see the move as a hiatus while Telecom waits on the outcome of the Optus sale, not everyone agrees and it may also be a recognition that there is not room for yet another mobile operator in Australia.

Whether being in the mobile business at the price of more than $A3000 a customer suggested for Optus is another question.

One telco executive noted acerbically that such levels were well in excess of the inflated prices New Zealand electricity retailers paid in the scramble for customers in 1999 and could never be justified on a cashflow basis.