Daily ShareChat: Telecom

By Jenny Ruth

Tuesday 3rd May 2011

The outcome of the government's ultra fast broadband (UFB) process is likely to result in a Telecom-friendly result, says Tristan Joll, an analyst at Goldman Sachs & Partners.

Last week, Crown Fibre Holdings announced Telecom and Vodaphone's joint bid for the rural broadbank initiative had been accepted and an announcement on which other bids have been accepted are expected by mid-May.

"From the government's perspective, we believe the economics of the UFB are more tenable with Telecom's involvement," Joll says.

If Telecom wasn't involved, the UFB would be undermined by Telecom's current capabilities, would be administratively complex and would be subject to higher execution risk, he says.

"We see no offshore precedents that support omission of the incumbent," Joll says. Fiscal pressures generated by Christchurch's earthquakes "will make 'white elephant' risk a more acute concern for the government."

Joll says the UFB will face challenges already seen offshore, such as a high build cost and low uptake, and "enticing Telecom to contribute traffic and assets to the project is the government's only sensible risk mitigation strategy."

Joll says his midpoint valuation of Telecom shares if a Telecom-friendly deal is the outcome is $2.44. Telecom should also have no problem maintaining and growing dividends across his forecast horizon but this isn't captured in the current share price ($1.98 at the date of his report).

Recommendation: Buy (raised from Hold).

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