Daily ShareChat: Telecom

By Jenny Ruth

Friday 30th October 2009

The government's ultra-fast broadband plans are tailor-made to encourage Telecom's competitors to participate because the government is shouldering the risk of low uptake, say Craigs Investment Partners analysts Geoff Zame and Ian Martin.

The government's invitation to participate shows the government will fund the fixed cost of the rollout to street level while private sector companies will fund the cost of connecting individual end-users to the network.

"Partners (eg lines companies) that don't face Telecom's legacy issues related to asset migration, accelerated caps and revenue cannibalisation appear to have the most to gain," the analysts say.

"This leaves Telecom in a delicate position given the risk of being cherry-picked in major metro areas," they say.

Under the government's plan, organisations are prohibited from participating if they don't submit tenders during the current bidding round, "highlighted the chicken-and-egg paradox for Telecom and suggesting that sitting on the sidelines is not an option," they say.

The risks of duplicating infrastructure and/or accelerated capital spending appear to have increased for Telecom.

"We find it difficult to envisage anything other than a value negative outcome for Telecom ... there is a lot of water yet to flow under the bridge, but our back-of-the-envelope assessment of downside risk (circa 40 cents per share) suggests an ongoing cap on share price performance."

Recommendation: hold.

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