By Jenny Ruth
Tuesday 25th May 2010 |
Text too small? |
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).
No comments yet
Telecom Corporation of New Zealand (TEL)
Telecom in drive to latch on to growing data usage with 4G mobile launch next month
Telecom lines up to buy 700MHz spectrum to extend reach of 4G network
Telecom backs setting copper prices until 2020, warns against getting too far away from input cost
Telecom puts $60M price tag on new Auckland data centre, Hawkins, AECOM win build
Telecom ends jobs purge, looks for ‘more sophisticated’ ways to save money
Telecom FY earnings fall to bottom of guidance range, sees unchanged dividend in 2014
Telecom takes spat with Vodafone to regulator after dropping court action
Telecom unbundling key to regulator's copper conundrum
Telecom lures customers to faster services in EPL deal