No Salvation In Sight For Telecom NZ

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

By Rudi Filapek-Vandyck

Telecom New Zealand ((TEL)) ((TEL.NZ)) shares enjoyed their peak in December last year, a few weeks later than most other stocks in the market as investors turned more cautious and started piling up on so-called defensive stocks. As a telecommunication company with a high prospective dividend yield, Telecom NZ shares seemed at the time a safer bet than many others, similar to the attraction Telstra ((TLS)) shares and instalments ((TLSCA)) have enjoyed since then.

However, Telecom New Zealand is no Telstra. There may have been times in the past when investors would prefer the New Zealand incumbent telco above its Australian peer, but this is not such a time. And the share price development since December has reflected this. (In case you don’t have a price chart in front of you: it’s a long spun out downsloping share price picture, starting at close to $4 and ultimately flattening out between $3.40-3.50).

 At this price level we’re talking dividend yield of 6.8%, but with downward bias, and with a negative trend ahead for the next few years.

The company has many more challenges ahead than Telstra. That much has become clear to securities analysts covering the stock. Telecom specialists at Citi had been comfortable sitting at the bottom of the market as far as earnings expectations go and they seem happy to stick with that position, reiterating on Tuesday morning what this is all about:  “Not a simple restructuring story” – “No Quick Fix” – “Risk of further PE compression?”. And to make matters worse, any positive catalyst is likely to be a while away still.

To recap the Telecom New Zealand story: the company is forced to undergo an operational separation between wholesale and retail (such as one that has been mentioned a few times in the past for Telstra, but has never been seriously considered by the Australian government).  And that’s just one of the many issues plaguing the company. No matter how many restructurings and plans have come out of the boardroom, the Australian operations remain a troubled child.

No surprise Citi analysts believe the rest of the market will soon draw closer to their point of view in terms of earnings expectations instead of the other way around. A point also made by their colleagues at ABN Amro who predicted yesterday management will use the upcoming Briefing Day (April 10, that’s within 48 hours) to reduce market expectations. This comes as close as one can get to suggesting the company is about to issue a profit warning.

On Citi’s forecasts the outlook is for continuous negative EPS growth with the broker’s current forecasts suggesting declines of 0.4% in FY07 and of 7.1% in FY08 will be followed by further decline of 7.8% in FY09 and again by a decline in the order of 3.7% in FY10. The broker also foresees that dividends will be cut along the way as well.

Turns out ABN Amro’s forecasts are only slightly different (dividend projections are currently higher though).

Only 48 hours to go before we will find out more.

Telecom New Zealand shares on the ASX were trading 12c lower, 3.4%, at $3.40 last time we looked.

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