OUTLOOK: PCCW to report 2000 net loss; goodwill write-off key swing factor
HONG KONG (AFX-ASIA) - Pacific Century CyberWorks Ltd is most likely to report a net loss for 2000 when it releases its results Wednesday but the size of that loss will depend to a large extent on how the company decides to account for the 180 bln hkd goodwill related to the purchase of Cable & Wireless HKT last year, analysts said. Analysts are also uncertain about how PCCW will account for its investment portfolio and its Network of the World (NOW) broadband content operations. Given these uncertainties, most analysts were reluctant to make projections for PCCW's 2000 results. Those surveyed by AFX-ASIA forecast a net loss of between 1.41 bln and 5.4 bln hkd, but qualified their forecasts, basing them on assumptions about how the company will present its accounts. They said the company is expected to consolidate HKT's results only for the period after completion of the acquisition in August 2000. Deutsche Securities analyst Nigel Coe sees a 2000 net loss of 5.4 bln hkd but stressed that the figure is "extremely polluted by a number of one-off acquisition-type expenses" making it an extremely volatile forecast. Coe expects the company to incur about 4 bln hkd in expenses for advisory and financing fees for the HKT acquisition. In addition, he has assumed that PCCW will mark-to-market its portfolio of listed investments and review the carrying value of the non-listed investments. He is forecasting a net loss of more than 400 mln usd, based on the value of the listed portfolio at end-2000, against the estimate for the book value cost of these investments. "However, any provision would depend on management's view of whether any impairment in value is temporary or permanent," he said. Coe has assumed a charge of 3.5 bln hkd, equal to about 50 pct of the venture capital book value. He also believes that spending on NOW in 2000 was around 1.5-2.0 bln hkd. On goodwill, Coe said that amortising through the income statement for 20 years will result in an annual recurrent charge of around 9 bln hkd, which would probably wipe out net income for the foreseeable future. He said the management is likely to "balk at this option." Further erosions in HKT's international revenue stream should mask a strong underlying performance in the local business, he said. However, "minor growth in HKT revenues will probably be insufficient to stem a further erosion in margins" at the EBITDA level, he added. Coe pointed out that the old HKT will no longer be of relevance due to the de-consolidation of the wholesale international assets and sale of its mobile assets into the Telstra joint venture. "This makes the local and business-to-consumer performance particularly crucial." He said beyond 2002, it is difficult to see where growth can come from for PCCW, given that tariff increases offer short-term revenue growth but market share erosion in the long term, and it is uncertain whether NOW will become a major revenue driver. The company is now heavily dependent on HKT's fixed line telephony, of which "it is difficult to see growth exceeding 5-6 pct a year in the long term." Furthermore, he pointed out the company has little room to take advantage of potentially cheap asset disposals by other telecommunication operators. The group's net debt at end-2000 is expected to have been around 4 bln usd. Although the company has debt facilities of up to 4.7 bln usd, there is insufficient funding capacity for the company, Coe said. "This makes it imperative that the company articulates a very clear and credible strategy for internal growth during its results presentation," he said. Nomura Securities' Richard Ferguson is projecting a 2000 net loss of 1.41 bln hkd and EBITDA of 3.2 bln hkd, based on the assumption that the company will write off its goodwill in its balance sheet, resulting in negative equity. "We have not included the numbers re-rating down its investment portfolio as the company can easily say the stocks are in a lockup period and hence want to keep them at the same value," he added. Ferguson said losses will mainly come from PCCW's interest expense, which is seen at 2.7 bln hkd, with 1.1 bln in arrangement fees. The acquisition of HKT has given PCCW an important source of earnings but these earnings will be balanced off by the huge debts taken on to pay for HKT, he said. In 2001, Ferguson sees PCCW booking 26.9 bln hkd in extraordinary gains from the sale of assets to the IP backbone and mobile service joint ventures set up with Telstra Corp. Excluding the extraordinary items, PCCW is expected to post a net loss of 600 mln hkd for 2001 with interest expense estimated at around 3.7 bln hkd offsetting any benefit from first-time consolidation of HKT's full year contributions. Worldsec Securities telecommunications analyst Bertrand Chui said he has based his earnings forecast on PCCW capitalising and amortising its goodwill of 180 bln hkd over 20 years. He sees a net loss of 2.6 bln hkd for 2000, with an EBITDA of 5.0 bln. He said the major contributor to the group's earnings will be HKT, with PCCW's operations offering minimal contribution. The amortisation amount for 2000 will be around 3.5 bln hkd. Interest expense is seen at around 1.6 bln hkd, with an exceptional loss of 1.9 bln hkd related to expenses for the acquisition of HKT and revaluation of venture investments. Going forward, based on the assumption that the goodwill will be amortised over 20 years, PCCW will report every year a rather low net profit figure, although HKT's operations will be "hugely cash positive". He said the results of the company going forward will not truly reflect its cash flow position or performance. "We believe that the fixed line business in the Hong Kong territory is very valuable," Chui added. He said the sale of the IP backbone and mobile assets is positive for PCCW as it will be able to consolidate a share of the joint ventures' earnings but not the capital expenditure necessary for these units.
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