AAPT - gunning for the top

And it wasn't a surprise either when Professor Alan Fels of the ACCC indicated that it would oppose the proposed takeover, set at $5.00 a share. Telecommunications is perhaps one of the few industries where the competitive rhetoric is matched by genuine price competition, and Fels wants to keep it that way.

What was a surprise was the speed with which the AAP price fell on the news, from an all-time high of $5.80 on 25 May 1999, shortly after our last review in issue 29 (Hold - $5.70) to $4.55 on 23 June 1999. It has since made a moderate recovery but with Grant Samuel indicating a 'fair value range' of between $6.00 and $7.00 for each AAPT share, perhaps now is the time to consider stepping aboard?

Low-cost entry point

Taking 17 November 1998, the day Cable and Wireless Optus started trading, as a base, none of the big three telecommunications stocks has markedly outpaced the others. So, what's to distinguish AAPT from the rest? One important factor is that Telecom Corporation of New Zealand Ltd now holds 19% of AAPT. With AAPT capitalised at around $1.06bn, the company is the lowest-cost point of entry for foreign carriers wishing to establish a beachhead in Australia. We feel this should put a floor under the share price and limit the downside risk of other investors coming on to the register. And of course, a foreign takeover probably wouldn't attract the ire of Professor Fels.

But what will really set AAPT apart from the others is the infrastructure in which the company is investing. The vision of AAPT's hard-driving American CEO, Larry Williams, is for the company to free itself from dependence on Telstra for access to telecommunications infrastructure. And this means big projects and deep pockets. The result should be valuable bandwidth that will give the company more of a competitive edge and act as an effective barrier to entry for others.

Let's look at a few of their projects. In the CBDs of the capital cities, AAPT has been building its own fibre networks (cables that allow high speed digital communication) to facilitate a cost-effective telecommunications service for large corporate and government bodies. This is a strident step into Telstra territory. For international services, the company has invested $40m in two consortiums' building undersea cables connecting Australia with the US and UK, allowing AAPT to offer its own bandwidth, rather than some other company's to customers calling overseas.

And the plans don't stop there. LDMS, an acronym for Local Multi-point Distribution Service is nicknamed 'fibre in the sky'. In technobabble this allows broadband telecommunications services to be offered in a wireless format, using a number of very high-frequency spectrums in which AAPT owns all the available licences. In plain English, it means AAPT can offer voice, high speed data and Internet services that bypass Telstra's wires, and will cost the customer less, without high maintenance and construction costs. And no one else can use the same technology on those frequencies. AAPT will be offering LDMS to customers by October of this year.

In the right place

AAPT is also hoping to carve a niche in the burgeoning mobile market. Using a technology called CDMA (short for Code Division Multiple Access), AAPT is seeking to offer services whereby data can be transmitted in high volumes and at high speeds in the 800 MHz range, using mobile phones. While the service is still in the planning stages, it should prove a lucrative market.

Such investments take time, but when they're being made in an industry that's showing such incredible growth, we would expect most of the infrastructure investments to payoff in the long run. The 1999 profit figures, expected in late August, should show a healthy level of earnings growth and confirm that the company is heading in the right direction.

A continuation of this earnings growth, which will be confirmation that the company has the right focus in a booming industry, along with its attractiveness as a takeover target, should help to maintain a healthy level of interest in the stock. We recommend subscribers ACCUMULATE now but closer to $4.50, the company becomes an outright BUY.