Debt level stretching Telecom, says broker

By RICHARD BRADDELL telecoms writer

The 29 per cent drop in Telecom's December-quarter earnings to $139 million highlights its stretched balance sheet, says sharebroker J. B. Were.

Telecom has said in recent weeks that it has the financing and capacity to complete a multibillion-dollar acquisition of Australian carrier Cable & Wireless Optus' cellphone business - although it concedes that the purchase would be complex.

But a report by J. B. Were analyst Andrew White says Telecom's debt has climbed to 67.5 per cent of debt plus equity and that earnings before interest and tax have dropped to 2.2 times interest costs, from 3.8 times last September.

"The further stretching of Telecom's balance sheet highlights the ongoing funding and structural issues.

"We think this will continue to be the main focus of the market's attention, particularly on the Cable & Wireless Optus transaction and/or Telecom asset sales."

J. B. Were, which had anticipated a $159 million December-quarter profit, maintains that Telecom stock is a buy at $5.20.

But it suggests that, regardless of the outcome of Telecom's bid for Optus, the construction of Australian subsidiary AAPT's $A700 million ($863 million) cellular network is unlikely to be resumed due to strong competition in the market.

Telecom has already spent $A125 million on the network. Construction was suspended in December pending a review with supplier Lucent Technologies that will be completed next month.

Mr White says: "Given the increasingly mature market and competitive nature of the mobiles market, we expect Telecom will not proceed with the project."

A helpful effect of a cancellation would be the avoidance of an estimated $17 million in second-half start-up costs.

The best news in the profit announcement was a dramatic turnaround in New Zealand cellphones. Telecom captured 51 per cent of new market growth in the December quarter after four quarters in which it gained only 43 per cent.