Daily ShareChat: Telecom

By Jenny Ruth

Sunday 14th November 2010

The pressures on Telecom are unlikely to ease in the near term, says Geoff Zame, an analyst at Deutsche Bank.

"Increased competitive intensity in retail broadband coupled with changes to industry structure across both access (UCLL [unbundled copper local loop] and UFB [ultra fast broadband])

and mobile (2 Degrees) highlight the challenging backdrop for Telecom to achieve meaningful revenue growth," Zame says.

However, its first quarter result "was a credible performance with the ongoing focus on cost-out enabling it to report a flat year-on-year EBITDA (earnings before interest, tax, depreciation and amortisation) performance and maintain full-year 2011 guidance despite some softness in the core drives of growth (mobile and broadband)."

Zame says Telecom's lines business, Chorus, may well be involved in the government's UFB plans in certain areas but now appears unlikely to secure the majority of the contracts.

Zame says there is material uncertainty around Telecom's longer term earnings profile under UFB. His bear case UFB scenario sees Telecom losing 10% of its access lines each year from full-year 2015 to 2020. That would push his valuation down from about $2.50 to $1.80. He puts the floor for the share price at $1.50 and has a $2.10 12-month target.

Recommendation: Hold.

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