Contact threatens to topple Telecom as biggest NZ stock

Friday 19th September 2008

Telecom, whose stock has fallen more than 60% in the past decade, is poised to be toppled from its reign as the nation's biggest public company by Contact Energy.

Shares of Telecom changed hands at as little as NZ$2.68 yesterday. The shares bought more than NZ$9.50 in early 2000. At today's price, the company has a market value of NZ$5.13 billion. Contact's market cap is NZ$5.05 billion.

Contact's profit growth profile may give it the edge over the next few years, as it embarks on an expansion of its generation capacity. The stock it rated 'buy' or `outperform' by six analysts who follow the stock. Earnings growth is forecast to rise 17% between 2009 and 2011, according to consensus estimates. By contrast, 10 analysts rate Telecom a 'hold', two say sell the stock and two rate it 'outperform'. Profit growth is forecast to stall over the next three years.

"Telecom's lost its gloss for good reason, its earnings are in decline," said Barry Lindsay, research manager at First NZ Capital in Wellington. "What appeals with Contact is electricity prices are rising and will continue to rise."

Telecom faces increased costs to comply with government regulation in a slowing economy with more competition from rivals such as Vodafone Group. Mobile revenue dropped 8.7% in the fourth quarter, the biggest decline of any Telecom unit, it said in July.

Government-imposed operational separation of the company's wholesale and retail units "will continue to significantly impact operating revenues, operating costs and capital expenditure," chief executive Paul Reynolds said. Its dividend this year won't carry imputation creits.

Telecom rose 2.2% to NZ$2.79 today, accounting for about 13.6% of the NZX 50 Index. Contact rose 0.8% to NZ$8.68, or 13.4% of the benchmark weighting, even though half of its stock is held by Origin Energy Ltd. Fletcher Building Ltd., in third place at 9.4% of the NZX 50, rose 2.9% to NZ$7.15.

Telecom's weight in the index has roughly halved from 30%

By Jonathan Underhill

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