Profit forecasts for Eircom for the year to end March 2001 have been cut sharply following the group's announcement that it was accelerating its cost-cutting programme and investing for future growth.
But analysts said the share price should remain around current levels. Eircom shares closed at €4.69 (£3.69) yesterday.
Current-year profits, due to be announced on May 24th, are expected to be broadly in line with market forecasts - pre-tax profits in a range of €700 million to €710 million (£551 million-€559 million) and adjusted earnings per share of 11.5 cents to 13.2 cents.
But increasing competition in the market, the costs of restructuring and investment to underpin future growth will reduce profits in the short term, Eircom announced in a statement this week. The group plans to reduce its 11,000 workforce by 3,500 at a cost of €406 million to achieve annual cost savings of €76 million.
Group stockbroker Goodbody has slashed its earnings-per-share forecast for the year to March 2001 to 9.8 cents from 15 cents and to 10 cents from 20.1 cents. This compares with its current year earnings forecast of 11.5 cents.
But analyst Mr David Lowe does not expect the revised profit forecasts to pull back the share price. Stating that on "a-sum-of-the-parts" valuation the shares would be worth about €5.00, he said he would expect the share price to rise rather than fall.
Davy analyst Mr Scott Rankin has cut his earnings per share forecast for next year to 9.8 cents from 15.7 cents. He expects earnings per share to remain at 9.8 cents for the year to end March 2002 from the earlier forecast of 18.5 cents respectively. He has cut his pre-exceptional profit-before-tax forecasts to €277 million from €397 million for next year and to €262 million from €452 million for the following year.
Commenting on the share price which fell back from €4.70 to €4.65 after the trading announcement on Tuesday, he said he did not think it deserved to fall much further. A sum-of-the-parts analysis still would point to a price of around €5.20 and a partial flotation of the Internet assets would help market visibility.
Davy sees Eircom as a medium to long-term story and has stated that the performance of the fixed-line business would probably get worse before it got better as competitive pressures had yet to reach their height. It expects profit recovery in the year to March 2003 when the cost reductions come through to the bottom line and the contribution from the "new" business areas start to make an impact.
ABN-Amro analyst Ms Jemma Houlihan is cutting her forecasts. She pointed out that earnings forecasts for telecoms companies had been cut because of changes in their markets and increasing competition. But she said she saw the Eircom trading statement as a positive move.
