Flat Telecom may produce spin-offs

By RICHARD BRADDELL

WELLINGTON - Telecom's share price rose yesterday after the company gave the strongest signal yet that it might float some of its operations such as Xtra, the internet service provider.

The company said no announcement was imminent, but it was looking at ways to release shareholder value in its new investments. Its shares closed up 23c at 860c, but are still well below their $10 peak.

Announcing a first half profit at the bottom end of analysts' expectations, chairman Roderick Deane confirmed that the company is in transition from being an earnings investment to a growth stock.

Analysts estimate an "embedded value" for Telecom's non-traditional activities between $13 billion and $19 billion, from businesses such as Xtra, the Southern Cross trans-pacific cable, and mobile phones.

Yet, the entire company's sharemarket capitalisation still hovers around $15 billion, reflecting its flatter earnings in recent quarters.

"Earnings are not growing as fast as we would like, but that's because we're paying the price for investing in the future," Dr Deane said.

Interest costs on Telecom's 81 per cent investment in AAPT, the Australian telco, trimmed $10 million off profit, while a goodwill write down took another $5 million.

Partially offsetting these figures was a $2 million contribution from AAPT's first half profit, itself down 58 per cent due to the costs of fighting off C&W Wireless's hostile bid and court costs from litigation against Telstra.

Reiterating that it would take three years for AAPT to become earnings positive, chief executive Theresa Gattung said the result was "exactly as expected."

But for AAPT, the $197 million net profit for the second quarter ended December 1999 would have been $210 million.

While the reported bottom line was down 2.5 percent on the $202 million in the same quarter of 1998, it still reflected relatively stable long distance prices, after 1998's fierce price competition.

However, the 4 per cent recovery in international call revenue in the second quarter was still not enough to offset the first half revenue fall of 5.9 per cent.

Ms Gattung said that while price cuts would continue, they would not match those of the past. She also expected international margins to improve when the Southern Cross cable became operational later this year.

While Telecom is maintaining an 11.5c fully-imputed dividend for the second quarter, it has also announced a dividend reinvestment plan to take effect in the third quarter.