WELLINGTON -(Dow Jones)- Telecom Corp. of New Zealand is likely to report a drop in fiscal third-quarter net profit Friday, analysts say, with its struggling Australian operations continuing to be a drag on earnings.
The earnings announcement by New Zealand's largest listed company by market capitalization will be closely watched for an update on the future of its Australian AAPT business.
The performance of Telecom's New Zealand operations, which was a positive surprise in the fiscal second-quarter results, will also be keenly anticipated.
According to the median estimate of seven analysts polled by Dow Jones Newswires, Telecom is forecast to post a net profit of NZ$224 million (US$143.3 million) for the three months ended March 31, down 13.5% from NZ$259 million recorded a year earlier. Their estimates ranged from NZ$220 million to NZ$237.3 million.
However, the company's fiscal third-quarter net profit last year was boosted by several abnormal items, and if they are removed, the expected fall in third quarter net profit would be around 3% on year.
Third-quarter earnings before interest, tax, depreciation and amortization - or EBITDA - are forecast at NZ$588 million, down 6.3% from NZ$628 million in the same quarter a year before.
Like many of its regional rivals, underlying earnings growth at Telecom in recent quarters has been moderate, reflecting strong competition, declining fixed-line revenue and increased expenses at its fast-growing mobile-phone and Internet-related operations.
While Telecom continues an aggressive and expensive push into mobile and broadband markets in New Zealand, it also faces significant challenges at its fixed-line Australian business AAPT.
In February, Telecom halved the book value of its Australian businesses to A$628 million, and it has been undertaking a strategic review of them with a view to either a merger, sale or retention.
Despite the company indicating in February that its review would be largely complete around the time of its third-quarter results, analysts don't expect the final outcome to be announced on Friday.
"I'm expecting more of a progress (report) rather than a completion," said Richard Long, an analyst at Deutsche Bank.
"If people are expecting some serious detail of what's happening on Friday, management certainly hasn't been setting them up to believe that's going to happen," he added.
Another analyst said there have been signals that a "meaningful" announcement on AAPT won't be made on Friday, and said that Telecom's review looks to be running behind its original timetable.
NZ Growth Likely Helped By Mobile, Broadband
Another poor performance by Telecom's Australian businesses is widely anticipated in the latest results.
Jeremy Simpson, an analyst at Forsyth Barr, said the Australian figures "are going to be pretty ugly," but he said that "in terms of value drivers it's really about what's happening in New Zealand."
In the company's home market "there should be some modest, underlying operating earnings growth," he said.
Telecom achieved EBITDA growth in its New Zealand operations in the second quarter for the first time since mid-2004, exceeding expectations with 3.6% growth on the year.
Analysts are expecting further growth in the third quarter, driven by Telecom's broadband and mobile businesses.
Deutsche Bank's Long expects "a couple of percent" in EBITDA growth in New Zealand, in contrast to Telecom's fixed-line phone business, which will likely "continue to deteriorate, perhaps at a quicker pace."
Telecom has been pushing hard into mobile and broadband services to counter a revenue downturn in its traditional fixed-line voice operations.
Mobile subscriber growth at Telecom has outstripped rival Vodafone New Zealand for five straight quarters, although Vodafone still holds a slightly higher market share.
Forsyth Barr's Simpson said Telecom has momentum in its mobile business, and has likely continued to perform "pretty well relative to Vodafone" in the third quarter.
But Telecom's mobile growth has come at a cost, with mobile acquisition and upgrade costs rising 24% on year in the second quarter.
The company indicated then that it expects a moderation in the rate of cost of sales growth in its mobile business.
Steve Hodgson, analyst at Macquarie Equities, said "we've probably seen the peak in their mobile cost of goods sold."
He said while that would be a positive, the outlook for Telecom is heavily dependent on what the New Zealand government does on the regulatory front in coming months.
"We're talking about the business as it is now, which is starting to look better," Hodgson said.
"The question is what damage do they suffer as a result of regulatory moves?" he added.
The government is expected to announce the outcome of a review of telecommunications regulation mid-year.
-By Paula Oliver, Dow Jones Newswires; 64-4-471-5990; paula.oliver@dowjones.com
(END) Dow Jones Newswires"
Posted to the site on 3rd May 2006
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