FYI | May 29 2006
By Rudi Filapek-Vandyck
Are incumbent telecom moribunds such as Telstra (TLS) and Telecom New Zealand (TEL) facing the new paradigm of low growth? We certainly believe so, but not everybody in the market is equally convinced.
This is not, however, the main reason behind a few Buy recommendations for Telecom NZ recently. Some experts have taken the view the market has been too negative on the new regulatory environment for Telecom NZ. Since the public switch in the Kiwi government’s stance on the local broadband industry, which is undoubtedly a negative for the incumbent, investors have pushed down the share price for the telco.
As recently as January Telecom NZ’s share price in Australia (the company has a dual listing) was trading above $5.50. A month later it was below $5.00. Since the beginning of May it has been nearer $3.50. It seems to be cruising towards the $4.00 again.
UBS was among the brokers who decided to upgrade its twelve month view to Buy this month, while acknowledging earnings clarity for the near term has been clouded by the change in government policy which aims to give greater leverage to increased competition.
Smith Barney Citigroup has been one of the loudest supporters of the stock, claiming the sell-off since early May has been overdone because the impact from increased competition won’t be felt as hard or as quickly as currently feared by the market. Citigroup rates the shares a Buy as well.
The latest to voice its support for the shares is JP Morgan. Considering the broker suggested a few weeks ago incumbent telcos across the Tasman Sea may be facing the new paradigm of low growth that may be somewhat of a surprise.
JP Morgan is taking the same stance as Citigroup: the competitive threat won’t be as fierce as currently feared by the market. The broker runs a parallel with European markets where the impact of so-called "Naked DSL" (allowing customers to sign up for broadband without having to sign up to voice services as well) has been rather limited.
JP Morgan also believes the fact that New Zealanders can make local costs at no cost gives Telecom NZ protection against new competitors as well.
JP Morgan rates Telecom NZ as Overweight, which for the ease of comparison, translates into a Buy at other brokers.
It has to be noted that the number of experts in the FN Arena universe who rate the stock positively remains in the minority with the stock currently rated Hold four times and Sell three times.
GSJB Were, for instance, has been flagging for months the overall environment for the likes of Telstra and Telecom NZ is trending towards a negative outcome.
We couldn’t help but notice that Ord Minnett, partly owned by JP Morgan and usually heavily reliant on the research provided by JP Morgan, upgraded the stock to an Accumulate on Friday.
JP Morgan doesn’t have an intermediary step between Overweight and Marketweight – it is either one or the other. But maybe the step taken by Ord Minnett indicates to investors the truth lies somewhere in between both views: yes, the market may have treated the shares a little bit harshly, but that doesn’t necessarily make the stock a Buy.
Does this now make Telecom NZ a "weak Buy"?