Telecom's $188m loss no surprise

By BRIAN FALLOW

Rod Deane was in remarkably fine form yesterday for a man who was nursing a sore back and had just written off two-fifths of the shareholders' funds of New Zealand's largest listed company.

The painful back was the fault of exuberant pet dogs, which bowled him over a few days ago.

The $850 million writedown for Telecom's main Australian business AAPT, it seems, was also just one of those things.

The price paid for AAPT was widely regarded at the time as a good one, Telecom's chairman said.

But the world had changed since then.

Investors had become more impatient, requiring a shift in priority to emphasise cashflow and earnings growth, ahead of the longer-term game of expanding revenue.

Telecom had adapted its strategy quickly, and its Australian business was now cashflow-positive, two years earlier than analysts had expected.

The AAPT writedown, from $2.8 billion to $2 billion, was only a change to Telecom's book value.

It did not affect the company's cash position or its operating earnings - which had improved - or its access to debt finance or its ability to maintain its dividend.

Telecom remained committed to Australia, which it saw as as its "engine of growth" in the medium to long term, Deane said.

"Compared with other telcos' adjustments, ours is modest. The telco world has become intensely demanding."

After the writedown, Telecom's balance sheet records shareholders' funds of $1.3 billion against $2 billion a year ago.

But Telecom's book value has long since ceased to bear any relationship to its market value. Even these days, when telcos are badly out of favour among investors, Telecom's market capitalisation is $9.3 billion.

The share price rose when the result - a bottom-line loss of $188 million for the June year - was announced. It ended the day 11c up at $4.98.

The market had expected the AAPT writedown, and the net profit, excluding abnormals, was 9.1 per cent up at $670 million - better than some analysts had expected.

Telecom will pay a final dividend of 5c a share on September 13, making 20c for the year, unchanged on last year.

Earnings before interest, tax, depreciation and amortisation (ebitda), the fundamental indicator of the strength of its cashflows, improved 9.4 per cent.

That reflected a 2.5 per cent increase in revenue and a 1.8 per cent fall in expenses.

Although Telecom's $6.9 billion debt total was almost unchanged on a year earlier, debt due within a year was down $1 billion to $1.1 billion.

Debt repayment would remain a strong focus over the next 18 months to two years, Deane said.



Two ratios of interest to the credit rating agencies are interest cover (now 5.5 times) and gross debt to ebitda (2.5 times).

Chief financial officer Marko Bogoievski said credit rating agencies Standard and Poor's and Moody's had said those ratios needed to be tighter before Telecom could say its current single-A credit rating was secure and it was a candidate for an upgrade.

"That implies several hundred million dollars of debt repayment."

Telecom halved its capital expenditure to $778 million, compared with the previous year, and intends to maintain that level for the next year.

Bogoievski said the company had been able to get good prices from suppliers of network equipment and had rationalised its technological platforms.

"We are regarded as efficient users of capital. Our capex to revenue ratio is 14 or 15 per cent, which is 2 or 3 per cent less than the average for the industry."