Telecom outdoes analysts

By BRIAN FALLOW

Telecom outdid analysts' forecasts with a $709 million net profit for the year to June 30, but signalled that keeping its bankers happy would continue to take priority over any increase in dividends.

The result, which compared with a median market forecast of $688 million, benefited from cost-cutting, a lower interest bill and some recovery in revenue growth in the June quarter.

In the previous year Telecom reported a bottom-line loss of $188 million after the $850 million writedown of its Australian business. Stripping out the previous year's one-offs the latest result represents an improvement of $36 million or 5.4 per cent.

The writedown a year ago left Telecom lying low in the water from a balance-sheet point of view, with shareholders' funds financing only 16 per cent of total assets, so debt reduction has been a priority in the past year.

Its strong operating cashflow (up $215 million to $1.56 billion) has allowed it to repay $606 million of debt.

Two key ratios closely watched by the credit rating agencies have improved. Interest cover (the number of times earnings before interest, tax, deprecation and amortisation - or ebitda - cover gross interest) improved from 5.27 a year ago to 5.69. The target is to get it to between six and seven times.

And the ratio of gross debt to ebitda improved from 2.48 times to 2.11; the target is to get it below two.

The company expects to reach those targets this financial year.

But it is circumspect about the prospect of any increase in dividends after that.

"First and foremost we are committed to maintaining a long-term A credit rating," chief financial officer Marko Bogoievski said.

It was still the board's intention to increase dividends over time, most likely through a higher payout ratio than the current one of around 50 per cent, Bogoievski said.

The timing and size of any increase would depend on the macro-economic and industry outlook, the company's capital and operating plans at the time, and whether the targeted credit ratios could be comfortably maintained long-term.

Capital expenditure was $600 million and only a modest increase to $650 million is budgeted for the current year. That is down from $778 million in the year to June 2002 and $1.52 billion the year before that.

But chief executive Theresa Gattung denies that capital spending has been squeezed by the focus on debt reduction.

"Those two years [when capital spending averaged over $1 billion] was when we made quite a strong investment in the Australian business, in Southern Cross [cable] capacity and started to roll out our new CDMA mobile network."

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