Market Calls

PCCW (8) launched its HK$9.6 billion initial public offering of its telecom assets (HKT Trust) on Wednesday. Analysts view the new listing as expensive. The flip side of that discussion is whether the IPO will create value for existing PCCW shareholders.

Lisa Soh (Macquarie) says the IPO represents a very good valuation of the HKT assets for PCCW.

'At the midpoint of the implied market cap, the HKT assets would be HK$31.8 billion,' Soh says. 'Post-IPO, PCCW would still own HK$20 billion of [shares in HKT Trust]. The current market cap of PCCW is HK$22.1 billion.'

In other words, PCCW would raise money from the sale and it would still own an asset with a market value equivalent to its current market cap. That suggests the PCCW share prices should rise after a successful spin-off listing.

Soh estimates a price-earnings ratio of 21.3 to 25.3 for HKT Trust. Its dividend yield is projected to be from 7.4 per cent to 8.8 per cent. She compares that range to that of SmarTone, which pays a 7 per cent yield and has a price-earning ratio of 14. Soh adds the largest asset on the business trust's balance sheet is goodwill. Goodwill is a conceptual asset that routinely gets written down by new owners of a business (HKT shareholders) following the spin-off or sale.

After the IPO, PCCW will focus on media and implementing technology 'solutions' for business. One can only guess how PCCW will fare at such enterprises, and these are still small businesses for the firm. 'It's a multi-year story,' Soh says.

Soh does not have a rating on PCCW because she is waiting to see whether the IPO goes through before she makes a call on the stock.

Alan Kam (Daiwa Securities) has an outperform rating on PCCW. Like Soh, he sees a successful IPO of HKT Trust as creating value.

'I like PCCW more [than HKT Trust] because the proposed demerger will make PCCW a net cash company. It will receive a stable distribution, and it will be in a stable position to deliver its media and solutions business in China,' Kam says.

He says that PCCW is already developing online video content for sale on the mainland. He adds that the sale of the telecom assets to HKT Trust and the positioning as a media/solutions firm recasts PCCW as the kind of firm it was in its 1999, pre-HKT merger days: a dotcom company dedicated to developing web content.

'I think [PCCW chairman Richard Li Tzar-kai] is not focusing on the telecom business. His interest is more on the media side of things,' Kam says.

The views stated here are those of analysts and are not stock calls by the South China Morning Post