Telecom profit set to fall 10 per cent

UFB is on analysts' minds as they predict Friday's results

Telecom's profit is expected to fall at least a 10th to between $360 million and $370m when it reports its annual results on Friday. Analysts looking ahead to an anticipated deal between Telecom and the Government over its $1.35 billion ultrafast broadband plan and the breakup of the company, are not expecting significant fresh insights from the company. Forsyth Barr analyst Guy Hallwright said Telecom's profit would be dragged down by a $38m tax charge caused by the removal of the ability to claim tax depreciation on buildings. "It is just an accounting construct, it doesn't mean they will ever have to pay $38m, but it will impact on the reported profit number." There was some chance Telecom might change its earnings forecasts for next year, but this was unlikely. The result could also be affected by the timing of interest payments and tax gains. Mr Hallwright forecast a net profit of $370m, at the upper end of expectations. "As long as it's in the ballpark I don't think anyone's going to be too worried. They are going to be focused on the future." A Dominion Post report that Auckland lines company Vector had submitted "an alternative proposal" to Crown Fibre Holdings involving Vector's possible participation in the ultrafast broadband initiative had heightened speculation that the contract to build the network would be awarded to Telecom's network arm Chorus, with any other companies playing only a secondary role. "The body language coming from Telecom is more and more [bullish]." There may still be room for the inclusion of other parties "but it is a question of on what terms", Mr Hallwright said. "I still think Crown Fibre would like, if it can, to get all parties that have useful assets to contribute – and not just ducts and poles – but it is a difficult thing to engineer." Craigs Investment Partners analyst Geoff Zame said market sentiment had shifted toward expecting Telecom to be "inside rather than outside the tent" and that could explain the rise in Telecom's share price. He forecast a net profit of $360m but did not expect the result would be a big driver for the stock. Goldman Sachs JBWere analyst Tristan Joll did not believe Telecom had the UFB contract in the bag, however. "If the Government wants the thing to have a certain economic future and be the best it can be, then probably having Telecom involved in some way makes sense. [But] we still think the rules governing the [UFB process] could change. I'd be surprised if the Government wasn't trying to ensure everyone who had something to offer was involved." He forecast a $370m net profit. "Last quarter was pretty weak in terms of domestic revenues. They did okay, but it was mostly based on cost-cutting. This quarter you are going to see the same sorts of things, but probably a bit milder on both fronts." Telecom had stopped paying compensation to customers hit by outages on its XT network but costs would have risen as it dusted off XT's marketing campaign. Mr Hallwright hoped Telecom's annual result would show faster growth for Telecom Mobile, after "softer numbers" from rival Vodafone, but the impact of new mobile entrant 2degrees was unclear. Sources suggested overall growth in the broadband market had slowed as it moved closer to saturation. TelstraClear chief executive Allan Freeth forecast competition for new customers would intensify in the year ahead. That prediction appeared to be borne out with the announcement that internet provider Slingshot would launch an uncapped broadband plan on Thursday costing less than $80 a month, though it is limiting customer numbers to no more than 10,000. Previous efforts to provide plans with unlimited data caps have faltered because of high use by few customers. Telecom has had two failed attempts, axing its uncapped Big Time plan in May.

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