Telecom Corporation of New Zealand (TEL)

Fat Prophets

Thursday 5th June 2014

What’s new?

Part of Telecom New Zealand’s new strategy involves pushing further into growth opportunities in mobile with the company adding 4G capacity. Recently the Commerce Commission approved Telecom’s purchase of a final lot of 700Mhz spectrum. A successful $83 million bid for the final sought-after lot followed on the heels of the $66 million purchase of three lots in an initial round.

The approval means Telecom is well positioned compared to competitors Vodafone and 2Degrees who have three and two lots respectively. Telecom is the only operator with four lots of this spectrum, and means that the company can potentially offer up superior speed and capacity to mobile customers.

The investment in 4G underlines the strategy of management to gain a competitive edge by providing the best service possible. The company also recently completed the first stage of a major IT re-engineering programme. .

Outlook

Management also confirmed that the name change (to ‘Spark’) was all go for August. This is not a magic bullet but is consistent with the new direction of Telecom and could remove many biases faced both at the customer and investor level.

Telecom has said that it is on track to generate underlying EBITDA of $925 to $945 million for full year 2014. We would not be surprised to see underlying earnings growth surprise to the upside as the new strategy gains momentum. The advent of a new internet TV and movie offering could provide another decent earnings stream longer term. This is as Telecom squares up to Sky, the dominant player in the pay TV space in New Zealand.

Telecom has also been busily divesting non-core assets over the past year, and there could be more in the offing. Further asset sales could also result in initiatives to boost capital returns in our view.

Price

Investor sentiment has been firm, with the shares touching a 21 month high in May. Investors continue to be encouraged (rightly in our view) by the transformation which continues to take shape at the telco. A change in name to Spark is symbolic and indicative of a real shift in strategy as management reposition the brand in line with growth opportunities in data, digital, cloud-based and mobile operations.

Worth Buying?

We like what we see in the turnaround at Telecom Corporation of New Zealand. The acquisition of 4G capacity and investment in systems further underlines the company’s commitment to providing customers with the best available service, and will enhance the telco’s ability to win market share.

The shares currently trade on around 15.5 times fiscal 2014 consensus earnings estimates which we still regard as modest given the earnings recovery gaining shape. An un-franked dividend yield of around 5.9 percent further bolsters the appeal.

Consequently, we believe Telecom Corporation of New Zealand is worth buying at around current levels.

Greg Smith is the Head of Research at Fat Prophets.

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