Cellcom, Israel's biggest mobile communications operator, is expected to see a steep drop of 20% to 30% in third-quarter 2002 profits because of diving financing income, TheMarker has learned.
For the first half of 2002, Cellcom reported NIS 120 million financing income, despite its annual bill for interest and principal of NIS 270 million to NIS 300 million on loans totaling NIS 2.7 billion.
Cellcom made its financing income through forex market futures, bought to hedge against the climbing cost in shekels of equipment procured overseas. The company struck lucky, from the perspective of its financial earnings, when the shekel weakened badly during the first six months of the year.
The equipment in question was mainly communications gear for its new GSM network, as well as cellphones for its customers.
Much of the equipment was bought in Europe, mainly from Nokia (NYSE:NOK), hence Cellcom was also active in the euro-dollar market.
In recent years the company managed to make money on its financial dealings in the Israeli forex market, generating handsome income on the shekel's devaluation, while protecting itself when the currency rebounded.
However, in the third quarter, the shekel changed direction. After three consecutive quarters of losing ground, and dropping from NIS 5 to the dollar to NIS 4.7, the shekel stabilized and began hovering within a narrow range that precluded major earnings from currency speculation.
Sources at Cellcom estimate that the company will have no real financing earnings to record in the third and fourth quarters. It may even return to posting a financing loss, as it did in 2001.
For 2001, the company reported a financing loss of NIS 52 million for the first half, and ended the year on a financing loss of NIS 15 million.
The loss of hefty financing earnings will also impact hard on Cellcom's operating and net profits in the third quarter, at a time when the company is expected to take charges on layoffs.