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Telecom shares fall on outlook for weakening profits

Friday 8th August 2008

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Shares of Telecom Corp, the biggest company on the benchmark NZX 50 Index, dropped after it said profit will decline as much as 30% this year, the second consecutive slide in earnings.

The stock fell 7.6% to NZ$3.40, with 11.5 million shares changing hands. Earnings from continuing operations fell 16% to NZ$713 million in the year ended June 30. Profit in 2009 may drop to between NZ$500 million and NZ$540 million, it said today.

Telecom is facing increased costs to comply with government regulation in a slowing economy with increased competition from rivals such as Vodafone Group Plc. Mobile revenue dropped 8.7% in the fourth quarter, the biggest decline of any Telecom unit, it said today.

"One of the thing we have been looking at is whether all the bad news is in the stock price," said Paul Richardson, who manages NZ$150 million of New Zealand shares and property at BT Funds Management. "Rivals are certainly more aggressive" in mobile. "Core volumes are dropping away as the economy slows down a little."

Mobile Phone Weakness

Mobile phone revenue fell to NZ$200 million from NZ$219 million in the fourth quarter. Sales from local service and calling, its biggest sources of revenue, both declined.

Shares of Telecom have lagged behind the NZX50 in the past five years as increased competition and regulatory changes eroded margins and drove up costs. Its profit margin in New Zealand "continues to reduce" as customers migrate away from more-profitable fixed-line services to mobile, the company said.

"In this new environment customers have more choice and opportunities than ever before," chief executive Paul Reynolds said.

Full-year sales rose 2% to NZ$5.67 billion though operating expenses gained 5.2%. In the fourth quarter, expenses grew 7.3%, outpacing a 3.6% gain in sales.

The company said the government-imposed operational separation of Telecom's wholesale and retail units "will continue to significantly impact operating revenues, operating costs and capital expenditure."

Regulated broadband services such as so-called naked DSL are likely to drive down prices and erode sales from traditional fixed-line calls, it said.

Telecom will pay a fourth-quarter dividend of 8 cents per share, payable Sept. 12. The company aims to distribute 75% of earnings as dividends, which arte likely to decline to 24 cents a share in 2009 from 29 cents in the 2008 financial year.

In addition, Telecom said it there would probably be zero imputation credits on its 2009 dividend.

"The yield to investors is effectively being cut by the imputation credits," BT's Richardson said. Telecom "is not a particularly high yield relative to the equity market."

By Jonathan Underhill

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