FYI | Aug 06 2007
By Chris Shaw
Telecom New Zealand reported normalised earnings of NZ$955m, a result a little better than the market had expected. What wasn’t better than expected was earnings guidance being revised lower for FY08 due to ongoing difficult conditions and the potential for both margin pressures and an increasingly competitive Australian market.
The result was therefore met with downgrades to forecasts by a number of brokers, ABN Amro suggesting there is actually little reason to be in the stock at the current time given the difficult regulatory environment it faces and the likelihood of earnings continuing to come under pressure.
While the broker has retained its Hold rating this is to reflect the attractive yield on offer, as following guidance for FY08 it has lowered its EBITDA (earnings before interest, tax, depreciation and amortisation) forecast to NZ$1,852m from NZ$1,932m. Risk appears to be to the downside as in its view news flow associated with the company should continue to be negative, particularly as the regulatory environment remains unsettled.
Even assuming incoming CEO Paul Reynolds can achieve a faster than expected turnaround in the company’s fortunes, the broker suggests there is unlikely to be any evidence of this for at least six months, meaning in the short-term there is little likelihood of an upward catalyst for the share price.
Deutsche Bank has looked at the result and come away with the same conclusion in that earnings pressure clearly remains to the downside given the lower guidance for FY08, but it suggests a yield of almost 7% is too good to pass up. While its target is now NZ$4.60 the broker retains its Hold recommendation.
JP Morgan is continuing to recommend investors go Overweight the stock based on the view the worst is likely behind it, particularly as in its view operational separation now appears off the agenda. Despite the cuts to forecasts implied by the latest guidance it is not unreasonable to assume the news from here on will be more positive, so the broker suggests the stock offers some upside potential.
Even allowing for this it has cut its price target to NZ$4.54 from NZ$5.15. Merrill Lynch has been just as severe in cutting its valuation to NZ$4.15, the broker also retaining its Sell rating given little chance for upside given ongoing regulatory issues.
UBS agrees, but adds to the list of potential negatives the company faces the possibility of a third entrant into the mobiles market in New Zealand. Such an outcome looks more and more likely in the broker’s view and would cut as much as NZ50c off its valuation.
Add in expected lower ULL (unbundled local loop) pricing and the broker has lowered its earnings in line with the 5-8% cut in FY08 guidance, which drives its price target down to NZ$4.25 from NZ$4.50.
The most optimistic view comes from Citi, who has accepted the FY07 result was lower than its analysts anticipated but points out guidance for FY08 is actually a little better than the analysts were expecting.
The broker also suggests the next few months should see a clearing up of the regulatory issues surrounding the company, which would improve the picture in terms of the future earnings outlook simply by increasing the clarity of the situation. With potential for some good news once the new CEO takes control the broker continues to see the stock as a Buy.
Overall the FNArena database shows the stock is rated as Buy and Sell twice each and Hold five times. The average price target is around NZ$4.50, while the median price target prior to the result according to Thomson One Analytics was NZ$5.05.
The stock has fallen slightly this morning and in New Zealand trading is down 5c at NZ$4.27, while on the Australian market as at 10.55am the stock was 7c lower at $3.82.