C&W Optus gets house in order

Since our last main review in issue 25 (Accumulate - $3.56), when we compared the prospects of the big three telcos (the other being AAPT), the share price has been anything but stable. When CWO made a takeover bid for AAPT at $5.00 per share in mid-April, investors marked down the company's shares to under $3.00, worrying that it would have to make a higher bid and pay too much for AAPT in the process. Then, in late May the ACCC pulled the rug from the deal and investors once again began to focus on the main game - its business performance. The share price happily found a spot in Telstra's slipstream and started its rebound back to current levels.

Delivers on promises

In an age when loyalty is bought rather than won, C&W Optus stands out. In its prospectus forecasts the company had a target of 170,000 local telephony customers by the end of June 1999. This figure was met only a week beforehand. Profitability forecasts are also likely to be met, driven by a major improvement in the mobile business, strong revenue growth in business network services and, of course, the size of its growing local telephony base. As many as 5,000 new subscribers are joining each week and worth their weight in gold when it comes to cross-marketing new services and products to them.

But there was one disappointment in the company's report on its performance for the nine months to 31 March 1999 - a poor result in long distance telephony. The core businesses of local calls, business network services and mobiles all reported solid revenue growth over the previous corresponding period. The mobile business generated good news with the customer base growing strongly.

The company now services over 90% of the top 150 companies in Australia - a very lucrative part of the market. After the pay-TV fiasco, costs are under control and capital expenditure is falling as a percentage of revenue, which is helping to bolster free cash flow and keep debt levels in check.

Is this enough to ensure future success? Probably not. The customer base may be increasing but this potential pot of honey will only be enjoyed if the services that Optus offers can be 'bundled'. That is, offered to customers as part of a package. In time, the company may provide local and international telephony, Internet and Pay-TV all on one bill and it's this agility that should provide the leverage to reduce costs, improve operating efficiencies and build revenue.

Consider 'high-speed' Internet access. CWO can think about entering this market because its fibre optic cable network now runs past around 2.2 million homes throughout Australia. Wisely, the company has brought in the major U.S. Internet Service Provider Excite@Home, as a partner to improve its chances of snaring a larger market share by using their technology and expertise.

Strong appeal

The weak link, of course, is pay-TV, although services like Optus@Home wouldn't be possible without the infrastructure originally used for pay-TV. In recent years it has been burdened with inferior programming, high costs and a low level of subscribers, but action is being taken. A deal with the Hollywood studios cut costs for product while a 'split level' pricing package will allow the company more flexibility in the pay-TV service it offers.

In short, after the problems with the pay-TV rollout and various technology hiccups, the company seems to be delivering on its promises. The share price has been pushed along by the Telstra-led telecommunications frenzy, but at least here, there is some substance to the claims of industry growth. We believe C&W Optus will continue to benefit and while there's a chance it could suffer a little due to the impending government Telstra sale, as a medium term investment, it has plenty of appeal. ACCUMULATE.