Daily ShareChat: Telecom

By Jenny Ruth

Monday 18th May 2009

Telecom's prospects hinge around its ability to protect its market share in cellular and broadband services, given the level of regulatory and competitive pressures likely in the next few years, says McDouall Stuart.

While price competition will stimulate volume growth, revenue growth will be muted and profit margins declining, it says.

And a decline in market share is inevitable as regulations will endeavour to foster competition.

Telecom's Australian operation, AAPT, should improve its performance following its merger with PowerTel but has yet to deliver.

"The gradual consolidation occurring in the industry could lead to Telecom's withdrawal from Australia," McDouall Stuart says.

The broker's forecasts show gross dividend yield rising from 8.8% in the year ending June to 10.4% next year and 11.4% the year after that. "While the dividend yield looks attractive, the uncertainty around future earnings levels could undermine its sustainability," it says.

In early May, Telecom reported net earnings for the nine months ended March fell 40% to $322 million. McDouall Stuart is forecasting a $510 million full-year result, falling to $415 million in 2010, down from $710 million last year.

"Uncertainties on Telecom's future regulatory and competitive landscape should cap share price performance," it says.

BROKER CALL: McDouall Stuart rate Telecom (NZX: TEL ) as HOLD

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