Daily ShareChat: Telecom

By Jenny Ruth

Friday 19th November 2010

Telecom's market share will inevitably decline as regulation will endeavour to foster competition, says McDouall Stuart.

Mobile termination rates are to be regulated and the Commerce Commission is to set prices and other terms by year end and other regulatory issues are pending.

"Telecom's prospects hinge around its ability to protect market share in cellular and broadband, given the level of regulatory and competitive pressure in the next few years," the broker says.

"Inevitably, this will involve lower pricing and the company will have to take significant costs out just to maintain profitability. The risk is that the cost reduction impairs the ability to grow the revenue," it says.

While price competition should stimulate industry volume growth, revenue and margins are at risk.

The government's $1.5 billion ultra fast broadband and rural broadband national rollouts have the potential to reshape the industry. While Telecom is on the shortlist for UFB it isn't one one three priority bidders and its involvement will depend on the government accepting its proposed demerger of its retail and lines businesses.

"While cashflow valuation appears attractive, the risk attached to achieving the outcome are high and the shares should trade at a significant discount to valuation," McDouall Stuart says. It values the shares at $2.78.

Recommendation: Hold.

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