FYI | May 04 2007
By Chris Shaw
Despite a quarterly profit result a little better than most in the market expected and no change to full year earnings guidance, it remains difficult for analysts to get excited about Telecom New Zealand (TEL), primarily because of the regulatory issues surrounding the company that are yet to be resolved.
The result itself was not something to create a buzz, as Credit Suisse points out while earnings were a little higher than it had anticipated the difference was largely the result of interest and tax benefits. Deutsche Bank agrees, noting on the positive side the company was able to lift volumes but this was offset by ongoing pricing pressures, particularly in mobiles.
ABN Amro wasn’t satisfied with the result as it notes costs grew faster than revenues in the period, Citigroup also noting revenue growth was a little lower than it had hoped for and costs were a little higher.
While management has retained full year guidance the risks appear to be weighted to the downside, Credit Suisse pointing out the core New Zealand operations are likely to continue to struggle given revenue growth in mobiles continues to slow thanks to competitive pricing and the potential for a new entrant.
There is some upside potential from the Australian side of the business following the company’s recent acquisition of Powertel, but as JP Morgan notes any increase will be off a very low base so the overall contribution to group earnings will still be small.
This means the focus for most analysts remains the regulatory issues the company faces, which include operational separation in its New Zealand business and the potential for this to impact on its fixed line operations in particular.
ABN Amro also points out the company has some serious thinking to do in terms of capital expenditure, as options such as a 3G network and an improved structure for its broadband offering in the New Zealand market must still be assessed.
Add to this the potential for shareholders to be disappointed by the announcement of a cancellation of shares worth NZ$1.1 billion, which Credit Suisse notes was below some estimates of as much as NZ$1.5 billion in capital management initiatives. Also disappointed was Deutsche Bank, which had though an accompanying special dividend was a distinct possibility, but the general feeling was that an on-market buyback would have been supportive while an off-market buyback will not be.
JP Morgan estimates the boost to earnings per share and dividends from the cancellation of shares should at least offset the lost earnings from the sale of the directories operations, so that is some comfort to investors.
Valuation is apparent at current levels, JPM noting the stock is reasonably priced given it is trading at around 12x earnings. What isn’t attractive though is the uncertainty as to the regulatory outcomes, which the broker suggests presents unacceptably high risks for the returns on offer.
The FNArena database shows the stock as rated Hold six times, compared to one Buy rating and three Sell recommendations. Price targets range from NZ$4.70 to NZ$5.15, while the stock is little changed today at a last price on the Australian market of $4.38.