Daily ShareChat: Telecom

By Jenny Ruth

Tuesday 17th November 2009

Telecom's headline first-quarter results exceeded both his and consensus forecasts but the underlying result was as expected, says First NZ Capital analyst Greg Main.

Telecom reported $447 million in operating earnings, including $35 million in dividends from Southern Cross, compared with Main's $412 million forecast, including a $17 million dividend.

"However, delving deeper, the result was pretty much in-line with expectations." The main differences were the dividend and "surprisingly" flat mobile cost of sales.

Telecom's investment case is being dominated by the risk of over-build by a fibre-to-the-home (FTTH) network. "The risk of losing several key metropolitan markets, possible low returns on capital Telecom commits to the FTTH process and risk to dividend levels will weigh on Telecom's outlook."

He expects Telecom to trade sideways over the next three to six months as investors wait and see what emerges from the government's invitation to participate in its FTTH proposal - submissions are due January 29, 2010.

If the government emerges with some viable partners, it will be in a strong position. However, if the government fails to attract viable partners, "then it will be forced to negotiate with Telecom," Main says.

"Telecom faces a tough decision on whether it participates with the government in its FTTH network proposals or not," he says.

BROKER CALL: First NZ Capital rate Telecom as underperform.

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