New Zealand: Telecom New Zealand surprises with profit

06 Aug 2003

Telecom New Zealand, the country's largest listed company, on Tuesday reported its first full-year profit growth in five years, but it continues to face strong competition in the Australian and mobile markets as it pursues new growth areas, says the Financial Times

The Wellington-based company said profits were NZ$709m (US$410m) in the year to the end of June, above even the most bullish analysts' forecasts and up from a NZ$188m loss last year, when it wrote down the value of AAPT, its fully owned Australian subsidiary, by NZ$850m.

"We have been successful in driving revenues in the growth parts of our business while at the same time maintaining tight discipline on cost, assisted by structural changes to our operating model," said Theresa Gattung, chief executive.

Although total operating revenues fell 6.25% to NZ$5.19bn during the year, expenditure almost halved, to NZ$2.88bn, pushing annual earnings before interest, tax, depreciation and amortisation (Ebitda) up by 4.9% to NZ$2.31bn.

A rapidly growing population helped boost Telecom's fixed-line operations, but AAPT and its mobile businesses remain under siege.

Telecom's mobile customer base fell by 56,000 to 1.25m customers, as Vodafone New Zealand increased its market share to 52%, although earnings rose 11.2% over the year.

In Australia, where AAPT is the third-biggest telecommunications operator, Telecom has been focusing the consumer arm on higher-margin customers rather than pursuing volume. This resulted in an 18% fall in revenues during the year, but AAPT turned cashflow positive, contributing NZ$92m after a negative NZ$28m impact in the previous period.

This was in line with expectations and "the building blocks are in place for continued improvement," Ms Gattung said, adding that Australia still represented the company's best option for earnings growth.

Although Telecom was operating in a difficult environment, analysts said the market was "enthused" by Ms Gattung's comments that Telecom might increase the dividend ratio from 50%. They speculated the company could pay out between 75% and 90% of earnings in the 2005 financial year.

Shares in Telecom, which comprises 28% of the NZSE-50 index, rose 12 cents, or 2.4%, to close at NZ$5.26 in Wellington.

The increased dividend would be dependent on Telecom being able to maintain its A credit rating, Ms Gattung said.

"The timing and quantum of any increase in dividend pay-out ratio will, however, be subject to a number of other factors, including the industry outlook, capital and operating plans," she said.

Telecom's gross debt fell during the year to NZ$4.88bn, or 2.11 times Ebitda, but it wants debt levels below two times Ebitda to keep its A rating, a target it expects to meet this year.

Standard and Poor's, the ratings agency, yesterday said Telecom had successfully grown operating cashflows and achieved meaningful debt reduction over the past two years.

"The challenge for management will be to continue making measured investment in its New Zealand and Australian businesses that can generate adequate returns and create a defendable market position, without materially damaging the company's capital structure and financial risk profile in the medium term," said Andrew Lally of S&P.

Source: Financial Times.

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