Markets ready for Telecom first loss

By PETER GRIFFIN

Telecom may present the market with one of the biggest write-downs by a New Zealand company when it delivers its full-year result tomorrow, but analysts are more interested in its cashflows and growth prospects.

The value of Telecom's $2.2 billion investment in Australian operation AAPT is expected to be slashed by up to $1 billion, a move that would see Telecom deliver its first loss - in the vicinity of $150 million to $350 million, according to analysts.

That is likely to shock small investors owning a fistful of Telecom shares, but will not faze the market in general, which has already factored AAPT's over-valuation into Telecom's share price.

A write-down would be unlikely to affect dividends paid to shareholders.

Telecom is expected to deliver a profit before abnormal items of around $640 million - similar to last year's $643 million profit.

The consensus of analysts appears to be that Telecom has been a steady performer in a lacklustre market, reining in capital expenditure and cutting costs to deliver a respectable result.

Forsyth Barr expects underlying profit to be up by about 5.9 per cent, thanks more to cost-cutting than revenue growth.

Key issues facing Telecom, according to Forsyth Barr, include a sluggish telecommunications market overall, regulatory changes that may favour Telecom's competition and the ability of the Australian business to add value.

"On the positive side the company is exhibiting it is doing the basics better in New Zealand and remains as well placed as any incumbent telco," Forsyth Barr says.

Deutsche Bank concentrated on Telecom's cashflow, the amount of cash a company generates during the year, and a useful indication of a company's financial strength.

It said Telecom generated lower operating cashflow of $812 million in the first three quarters of the year, but was expecting a rebound in operating cashflow for the quarter ended June 30 of $489 million.

"We believe that without a rebound in [fourth quarter] operating cashflow, Telecom may face increased scrutiny from value managers and ratings agencies.

"Both parties are looking towards free cashflow delivery to repay Telecom's debts," a Deutsche Bank forecast read.