Daily ShareChat: Telecom

By Jenny Ruth

Tuesday 25th May 2010

Telecom's underlying third quarter results were better than expected with the normalised $97 million net profit down 39% due to significantly higher dividends from subsidiary Southern Cross in the year-earlier quarter and a steep rise in depreciation this year, says Nachiket Moghe, an analyst at Sydney-based Aegis Equities Research.

Telecom's profit margins are being squeezed by falling prices, competition and technology changes while the regulatory environment is getting tougher, Moghe says.

"Good progress is being made on reducing costs to counter revenue challenges," he says. The company will have to continuously cut costs in order to achieve earnings growth, which it is struggling to achieve.

"Mobile and broadband are key areas of future growth while fixed line and international face bleak prospects."

But cash generation remains strong, underpinned by declining capital spending, he says.

The government's ultra-fast broadband program creates the biggest uncertainty to the firm's returns, cash flows and hence dividends.

While the stock has been under pressure, most of Telecom's problems seem to be already factored into the share price, Moghe says.

"We think investors are assuming the worst case scenario which creates potential opportunity should things pan out differently," he says. In the meantime, the stock's yield is attractive.

BROKER CALL: neutral (upgraded from reduce).

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