Telia sees profit growth

August 16, 2001 Posted: 0959 GMT

By Jan Strupczewski

STOCKHOLM, (Reuters) - Telia AB, the biggest Nordic telecoms operator, disappointed investors on Thursday with a smaller than expected rise in second quarter core earnings despite forecasts of continued profit and sales growth.

The partly privatised Swedish group said its core earnings, or EBITDA (earnings before interest, taxes, depreciation and amortisation), in the second quarter were 3.0 billion Swedish crowns ($295 million) against a consensus of 3.4 billion crowns.

“For the rest of the year we expect sales and profit growth in the group's core business to continue,” Telia Chief Executive Marianne Nivert said in a statement.

But the company's falling profitability sent Telia shares eight percent lower in morning trade to around 47 crowns, down from a 51 crown close on Wednesday.

Since its listing in June 2000, Telia has outperformed the Stoxx telecoms index by 31 percent and all Nordic competitors, despite falling from its introduction price of 85 crowns.

The stock has benefited from Telia's lack of debt compared with other operators, as Telia is sharing the costs of building a third-generation (3G) network with local rival Tele2 and has cash from divestments.

“The EBITDA result is worse than expected mainly because of the international carrier business. The positive thing is that sales have risen,” said Jan Dworsky, telecoms analyst at CAI Cheuvreux brokerage.

CARRIER UNIT WEIGHS

Telia's international carrier unit, which sells telephone ducts and fibre and network capacity, reported accelerating losses. Telia did not say if it still expected the unit to return to profit, measured by EBITDA, by the end of next year.

Telia also said that during the second quarter the unit had renegotiated the sale of 1.2 billion crowns of infrastructure to take payment quarterly over the period of the contracts instead of on delivery, as previously negotiated.

“That's bad for margins, though not valuation as a whole. It shows how weak the sector is,” a Swedish fund manager said. Also negative was the 100 million crown credit losses the division burdened the group with in the first half, he said.

The profitability of Telia's biggest money earner, the networks division, also eased to 29 percent in the second quarter from 33 percent in the first despite a small rise in sales quarter-on-quarter.

Group sales were 14.2 billion against expectations of 13.97 billion and profit after financial items was much better at 909 million against consensus of 439 million crowns, excluding extraordinary gains from a series of divestments.

The report gave no information on several market concerns about future growth in the saturated Nordic telecoms market, Telia's acquisition plans or ways of keeping mobile phone customers after a new regulation comes into force in September.

The change in regulation will allow mobile phone users to switch operators while retaining their old telephone number.

NO NEWS ON ACQUISITIONS

Telia is in acquisition talks with Finland's debt-laden Sonera and Denmark's TDC, but differences over valuation are stalling progress and could even bury the project, sources close to the negotiations have told Reuters.

The acquisitions would be the quickest way for Telia to boost its sales and therefore profitability, but investors are also concerned that the company should not overpay.

“It was a weak report, overall. With new competition from third-generation (3G) mobile operators around the corner, Telia is not a stock hold now,” the fund manager said.

Telia itself did not get a 3G licence for Sweden, but teamed up with Tele2, which did, to provide 3G as a virtual operator.

The mobile unit's margin edged lower quarter-on-quarter to 44 percent in the key Swedish market from 45 percent in the first quarter and to 26.6 percent from 27.9 percent in group mobile business as losses in Danish and Finnish operations grew.

Profitability fell despite a rise in average revenue per user (ARPU) to 280 crowns in the second quarter from 273 crowns in the first and 130,000 new customers in the Nordic area.

Telia's group EBITDA margin fell to 21.2 percent in the second quarter from 21.7 percent in the first quarter, moving against a higher profitability trend set by its two main Swedish competitors Tele2 and Europolitan.

“At first sight this is a disappointment as far as profitability is concerned,” said Joachim Grebe, analyst at Ohman brokerage.

In the quarterly report Telia did not say what it would do about mounting losses and debt at Poland's second biggest fixed-line operator Netia, where it holds 48 percent. Netia has recently said it needed $350 million to survive until 2003.

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