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Government-owned Kordia exposed to Australia's Huawei 5G ban

Government-owned Kordia exposed to Australia's Huawei 5G ban

5G ban has pushed some expected revenue out into future years, CEO says.

Scott Bartlett (Kordia)

Scott Bartlett (Kordia)

State-owned enterprise Kordia may have 10 million reasons to hope Australia eases its ban on Huawei being involved in its 5G roll-out, unlikely as that appears to be.

The company has banked on winning some of Huawei's 5G rollout business through its Kordia Solutions Australia (KSA) arm, prompting the Auditor-General to highlight the issue in a report to Parliament.

At the core of the issue is the risk of losing over $10 million of Australian assets in the form of tax losses from previous years.

"We note that management’s forecast is based on future growth potential in the solutions business, which provides services to help with deploying the 5G network in Australia," the watchdog reported. 

"The forecast is predicated on the solutions arm successfully acquiring large contracts from customers like Telstra and Huawei."

However, the ban imposed late last year over security concerns appears to have thrown those revenue projections into disarray.

In its 2015/16 annual review, Kordia told Parliament's economic development, science and innovation committee it expected its revenue for Australian operations to increase from $151.4 million to $201.5 million in 2018/19. 

Part of that growth was from an anticipated increase in KSA revenue from Huawei 5G contracts

KSA’s revenue for 2017/18, however, was just $109 million.

The Auditor-General reviewed and agreed with management’s assessment of a carrying value of $10 million for a deferred tax asset on previous tax losses for Australian business. 

However, he also noted there was a risk that if KSA failed to achieve the forecast results, the asset might have to be written off.

It is unclear why the asset is considered at risk, however, because Australian company tax losses do not expire.

One potential situation that could put it in peril would be if losses from the business continued, resulting in a sale. Australian tax losses cannot be transferred when a business is sold.

Kordia CEO Scott Bartlett told Reseller News a significant portion of KSA work forecast for this financial year centred around the rollout of 5G. 

"As several of these projects directly involved Huawei and other Chinese vendors, our business has been impacted, as is the case for many other players in the market who’ve also had to go away and reassess business and revenue streams," he said.

"We think this will be temporary as we know 5G is going to happen. The Chinese vendor ban in Australia has simply delayed it as the industry has had to digest the impact and make alternative arrangements."  

When it does, KSA will be in a position to maximise opportunities, Bartlett said. 

For now, however, a material amount of revenue has been pushed into future financial years and KSA has been restructured to weather current volatility.

Bartlett said the KSA team has expertise in a wide range of areas, including the design and build of small cells, signal jamming solutions used in prisons, in-building coverage solutions, right through to transmission tower design, build and decommissioning. 

"KSA has many strings to its bow and we are working hard to leverage these opportunities while we wait for the main 5G projects to commence." 

Other parts of the KSA business were performing well, he added, as was the New Zealand solutions team, while the "hugely volatile" telco market was expected to settle down towards the end of the 2019 calendar year.

"Regardless, the potential risk is if KSA fails to meet its forecasts over the long term – that is, multiple financial years on the trot," Bartlett said.

At the time of writing, Reseller News could find no evidence Kordia was quizzed by the committee on the issues suggested by the Auditor-General either during its annual review hearing or in writing.

Committee chair and New Plymouth MP Jonathan Young consulted the records and confirmed the questions had been asked. The post-hearing questions and responses are here.

Kordia told the committee around $30 million in revenue had been deferred from 2018/19 as a result of the ban on Chinese vendors supplying to Australia's 5G networks.

Kordia recorded increased revenues of $217.2 million in the year to the end of June 2018, up from $200.9 million in 2017. A loss of $1.2 million in 2017 was turned around to a profit of $5.7 million.

There was no breakdown of Kordia's Australian and New Zealand results in the company's 2018 annual report.


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