Telecom profits surge ahead

By PAUL BRISLEN

Telecom's shares hit a three-year high of $6.27 yesterday after it predicted underlying profits next year would top $820 million and lifted returns to shareholders.

The telecoms giant, which also disclosed net profits in the year to June had risen from $709 million to $754 million, later gave up some of those gains, its shares closing up 3 cents at $6.19.

Telecom, lifting its annual dividend from 20 cents to 27 cents a share, plans to pay 9.5 cents per share for the first three quarters of 2005.

"The [share price] reaction has been to the payout ratio," UBS Warburg analyst Campbell Stuart told NZPA. "It was slightly better than our expectation."

The surge in profits reflects Telecom emerging from the shadow of its disastrous foray into Australia in 1999, when it poured $1.5 billion into that country's third-largest telecoms operator AAPT. It has since written off $1 billion from the venture.

A cautiously delighted Telecom chief executive Theresa Gattung said: "We're comfortable with the consensus of $821 million although probably we would have some difficulty seeing that we would do better than this."

She said, however, there would be no "rush of blood to the head" that could see Telecom investing in new markets beyond New Zealand and Australia. Instead, the company will retain its "strong focus" on managing capital, risk and expense.

Chief financial officer Marko Bogoievski said AAPT was now a core part of Telecom's transtasman approach to business and was still worth around $1.5 billion. Telecom still wrote off $16 million from AAPT's wireless LMDS network, which connects exchanges to the network backbone.

But this pales in comparison to the $215 million hit the group took in 2001 when AAPT closed its mobile network and the $850 million writedown when the dotcom bubble burst.

Telecom retired $938 million in debt this year and with cash reserves next year expected to exceed $500 million, it plans to pay off a further $200 million to $300 million. That will leave its net debt at just over $3 billion and give it the scope to push ahead with its dividend increases.

Telecom chief operating officer Simon Moutter said the group's investment in its "next generation network", which would allow it to cut costs and offer better services, continued apace.

The company was moving from "thinking about it to implementing it" and would spend $120 million over the next five years to extend the reach of its fibre network.

A project to link homes and businesses to Telecom's core network with fibre-optic cable will also be piloted in Manukau to test demand.

The first next-generation exchange will be installed in Auckland next year to provide new services and $125 million will be spent enhancing the national fibre network backbone.

The mobile market upheaval continues with customers moving from Telecom's ageing TDMA 025 network to its CDMA 027 network.

Telecom has written off part of the TDMA network to the tune of $74 million. It expects to switch off the network by the end of 2007.

It is also committed to spending all of its $650 million capex budget next year, up from $608 million this year.