Hutchison Shocks The Telco Sector

This story features HUTCHISON TELECOMMUNICATIONS (AUSTRALIA) LIMITED, and other companies. For more info SHARE ANALYSIS: HTA

By Chris Shaw

Hutchison Telecommunications Australia ((HTA)) easily beat market estimates with its half-year result released yesterday, the result showing the company continues to benefit from the merger of the Vodafone and 3 Australia businesses just over a year ago.

The merger created VHA Australia, in which Hutchison has a 50% stake, and this business recorded strong subscriber growth in the period of 539,000 additions. This was well above market forecasts, as for example Citi had been expecting subscriber adds of around 350,000.

According to RBS Australia and BA Merrill Lynch the subscriber adds result implies VHA is taking some market share from others in the industry such as Telstra ((TLS)), particularly as growth in mobile handsets outstripped that of wireless broadband by a ratio of about 4-to-1.

But as Goldman Sachs notes, a closer look at the subscriber numbers offers some cause for caution as while for the six months as a whole the increase was significant there was a sharp slowdown in the June quarter to around 50,000 net adds compared to around 490,000 net ads in the March quarter.

RBS Australia estimates average revenue per unit (ARPU) for the six months declined by 3.7%, reflecting a lower contribution from the voice operations and an increased mix of lower value mobile broadband subscribers. The broker sees this result as reflective of aggressive price cuts in the market overall.

From the second half of 2009 to the first half of 2010, RBS Australia estimates Hutchison's share of VHA showed a profit turnaround of $132 million which reflects not only the subscriber growth being achieved but the delivery of cost synergies from the merger.

The other point made by RBS Australia is that the creation of VHA has delivered a mobile carrier with better scale, which is helping deliver an increase in margins. The broker estimates margins improved to 22% from 15% previously, with scope for margins to increase to 25% by the second half of 2012 when merger gains should be fully realised. Such merger gains will be important as Goldman Sachs expects VHA will continue to be a price leader in the industry, where competition is expected to intensify over time.

JP Morgan notes customer acquisition costs in the period were relatively stable at around $155, which is a solid improvement from $195 for the same period in 2009. An increase in acquisition costs is expected going forward as new products such as iPhone 4 and new Android phones are introduced in the second half of this year.

One positive for Hutchison is the increase in costs associated with these new products will also be felt by other operators in the market. These new products are also likely to increase the data demands of customers, so BA Merrill Lynch expects increases in capex for Hutchison as backhaul is upgraded to meet this demand.

Post the result brokers have revised earnings estimates significantly, though as Macquarie points out the changes come off a low base. In earnings per share (EPS) terms Macquarie has lifted its forecasts to 0.1c this year, 0.4c in 2011 and 0.8c in 2012, the latter two forecasts being increased by 143% and 19% respectively.

Citi has gone the other way and cut its EPS estimates by 36% this year and by around 7% in 2011 and 2012 to outcomes of 0.4c, 0.8c and 1.1c respectively, while Goldman Sachs has lifted its 2010 EPS forecast to 0.3c from minus 0.2c previously and lifted its 2011 estimate to 0.3c from 0.2c previously. Consensus EPS forecasts for Hutchison according to the FNArena database now stand at 0.4c in 2010 and 0.5c in 2011.

No broker has changed its recommendation post the interim result, meaning Hutchison is rated as Buy twice, Hold three times and Sell once. RBS Australia has one of the Buys, expecting a continuation of strong earnings growth in coming years thanks to the combination of market share gains and merger synergies.

BA Merrill Lynch however continues to have some concerns over debt levels within VHA and these are enough for the broker to retain its negative view. For Macquarie, which has a Neutral rating on Hutchison, the issue is while debt is reducing there are still no clear signs of when investors may see the company start to generate free cash flows.

The changes to earnings estimates associated with the interim result has had little impact on broker price targets, the FNArena database showing an average target now of $0.132c, down from $0.134 prior to the result.

Shares in Hutchison today are weaker despite a stronger overall market and as at 11.50am the stock was down 0.6c at $0.099. This compares to a range over the past year of $0.088 to $0.135 and implies upside of better than 35% to the average price target in the database.

 

 

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