A Long March For Telecom NZ

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

By Chris Shaw

In what wasn’t a particular surprise to the market Telecom New Zealand ((TEL)) has announced it will build an 850mhz mobile network to deliver improved services across its home market, an announcement that has forced analysts to revise up their expectations for capital expenditure in coming years.

At the same time, earnings expectations have been revised lower on the back of new guidance from management and while the stock is now trading at relatively inexpensive levels of around 10x current year earnings on Merrill Lynch’s estimates, the broker makes the point the history of earnings disappointment and downgrades is likely to see investors adopt a wait and see attitude before aggressively looking for value.

Post the update, the broker has cut its earnings per share estimate for FY09 by 9%, an amount broadly in line with the changes made by Citi and others on the back of yesterday’s announcement. Macquarie makes the point the additional capex will put further strain on the group’s balance sheet, meaning its ability to execute the rollout of the new network will be critical.

Given this means there are downside risks to earnings from any problems that arise, the broker has retained its Underperform rating on the stock, making it and Deutsche Bank the only brokers in the FNArena database to take such a negative view on the stock. Citi in contrast has a Hold rating, suggesting while the additional capex will delay any earnings recovery there should be an eventual return to solid earnings performance.

JP Morgan suggests the fundamentals of the network rollout support the move, but estimate it will cost an additional NZ$390 million to implement and so the broker remains at Neutral on the stock, matching the rating of ABN Amro based on the view early signs of an earnings turnaround may emerge during 2009.

Overall, the FNArena database shows the stock is rated as Accumulate once, Hold seven times and Sell twice. Merrill Lynch makes the point that even though the stock is inexpensive, the earnings and capex issues make Telstra ((TLS)) a preferred exposure in the sector.

Post the update from management, average price targets are now centred around the NZ$2.50 level, having been closer to NZ$3.50 prior to the update. Shares in Telecom New Zealand today are weaker on the Australian market and as at 2.55pm the stock was down 15c or 6.9% at $2.03. This compares to a trading range over the past year of $2.02 to $3.96.

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