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Steady-as-she-goes quarter for Telecom

By Rob Hosking

Friday 31st January 2003

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Analysts were yesterday picking a solid, flat result for Telecom's second quarter next week.

Predictions for the quarterly profit range from $143-150 million but analysts say investors will be looking beyond the numbers to whether the company can pull itself around in the second half of the year.

"There are some risks that they might pull back their forecasts for the second half of the year ­ some people now don't think they'll be able to achieve $400 million for the third and fourth quarters," UBS Warburg's Paul Richardson told The National Business Review.

"We're not expecting much revenue growth overall and there will probably be a decline in revenue from the Australian operation."

Telecom's transtasman subsidiary, AAPT, will remain the focus of much attention. The company hopes to achieve some efficiency gains in the second half of the year ­ last year Telecom announced it was getting rid of some of the lower- margin parts of AAPT's operation ­ but these are not likely to flow into next Tuesday's result.

"The business market for telecommunications is pretty tough in Australia and there is not much room to move in the consumer area. And AAPT Mobile has yet to make much progress."

Having said that, Mr Richardson expects Telecom may be able to lift its dividend by early next year, if it continues to pay down its debt.

"Dividends are now the key measure for telecommunications stocks. Telecom is not going to be able to get any lift in its divided this year but it may be able to by March 2004."

The timing of any improvement in the Australian operation would be important to investors, Forsyth Barr's Jeremy Simpson said.

He also expected there could be comment about the impact of the changed regulatory regime in New Zealand. Some analysts have suggested the new regime, with a special telecommunications commissioner, has been harder than expected on Telecom.

However that wasn't flowing through into the markets, he said.

"For an incumbent telco it's part of the game and they should be trying to factor that in to any forecasts."

Another analyst said Telecom's target for the year implied better profits for the final two quarters but thus far there was no solid indication as to where those added profits would come from.

"People will be looking for some added visibility on that," he said.

Again, the Australian operation is seen as key. The hope will be that some of those added profits will come from AAPT, Macquarie Equities analyst Scott Ryall said.

The expected downturn in the Australian economy ­ signs of which are already emerging ­ may cause a disappointment on that score.

"They need to win business revenues, and to the extent business conditions are poorer, that doesn't help them. But the market has been pricing in pretty poor business conditions for telco and IT spend for some time, so it shouldn't be a big thing."

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