Telecom feels the global slowdown

Friday 13th July 2001

By Campbell McIlroy

Telecom's share price shed 7% this week as questions were asked about earnings potential in the sector and brokers downgraded the stock.

From July 2, the share price has fallen steadily from $5.60 to a low of $5.15 before recovering to $5.21 yesterday morning - a drop of nearly $725 million over two weeks.

Early this week broker SalomonSmithBarney (SSB) announced an earnings and recommendation downgrade. Earnings forecasts were shaved 5-12% for 2002-2004. Its assessment was also changed from outperform to underperform.

Underpinning the downgrade was a reassessment of Telecom's mobile and data revenue growth, possible escalation in price competition in the business market, and the time required to convert its strategic investment in Australia into profit growth.

The SSB report said the company was concerned Telecom might require additional equity at some point to fund a 3G (third-generation) rollout which might compromise its credit rating.

As Telecom converted its mobile network to the CDMA platform, SSB expected Vodafone to target Telecom customers and compete on price. It also remained to be seen whether the switch to CDMA would pay off as worldwide there were only 70 million customers compared with 300 million for GSM.

Growth in the data market was also expected to come under pressure as indications were most businesses were putting expenditure under tight scrutiny. Competition in the business market was also expected to increase as both Clear and Telstra Saturn ramp-up their efforts to eat into Telecom's 85-90% market share.

Although SSB continued to view Telecom's $2.3 billion purchase of AAPT in Australia as strategically imperative, the time required for this to translate into earnings' growth has been underestimated.

Factors that would lead SSB to reconsider its valuation included an amalgamation between Telstra Saturn and Clear, and 3G mobile infrastructure sharing between Telecom and Vodafone.

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