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Telecom shares touch new low; Reynolds seeks level playing field

Friday 7th May 2010

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Shares in Telecom fell as low as $2.08 after chief executive Paul Reynolds repeated his plea to government to ease its regulatory burden as technology shifts from copper to fibre-based networks. The shares recently traded at $2.09, and are down 14% this year.

Reynolds told a briefing on the company’s third-quarter result that the “playing field is tilted against Telecom” and that the government needs to align its goals of a nationwide fibre network with the phone company by not imposing the same set of controls on the new technology that are on the existing copper lines.

Questions remain as to what impact the government’s proposed $1.5 billion partnership with private enterprise in rolling out a fibre network around the country will have on the Telecom.

Reynolds repeated earlier indications that there was too much uncertainty for the ultra-fast broadband (UFB) initiative to be quantified in its earnings forecast.

“There’s a lot of uncertainty around the company and the industry itself,” said Alan Moore, who helps manage $600 million at Milford Asset Management. “The market’s fallen out of love with the sector at the moment.”  

Telecom faces losing its market dominance if it misses out on part of the government’s broadband initiative, with Canada’s Axia putting in the only other national bid to rival the New Zealand company.

Reynolds again said the company is open to all options to participate in the project, which prohibits Chorus from participating due to Telecom’s majority control of the network company.  

The phone company’s net income declined to $97 million, or 5 cents a share, from $159 million, or 9 cents, a year earlier, beating Forsyth Barr’s estimate of $84 million. Operating revenue declined 10% to $1.4 billion, while earnings before interest, taxation, depreciation and amortisation (EBITDA) declined 2.9% to $464 million.  

Network business Chorus earnings gained 1.1% to $188 million in the three months ended March 31. The division last week hit the half-way mark of its government-mandated cabinetisation process, which aims to give 80% of New Zealanders access to internet speeds of up to 20 megabits a second by the end of next year.  

Telecom’s Wholesale & International business posted a 10% decline in EBITDA to $60 million, and Reynolds flagged its international voice business, which accounts for about third of the division’s earnings, as an area that might be sold, or put into a joint venture.  

Telecom Retail earnings edged up 0.9% to $113 million in the quarter, with a 1.4% gain in mobile revenue and a 2.2% increase in broadband and interest earnings. The unit boosted its spending on labour by 5.1% to $41 million for the three month period as it brought on temporary staff to deal with customer enquiries during the outages with its problematic mobile XT network.  

The phone company released its independent Analysys Mason report into XT’s failings, which pointed the finger at “immature operational management systems” and a lack of preparation for the rapid uptake of customers. The report found the network met architectural best practice and said Telecom and partner Alcatel-Lucent were on the right track.  

The company was prepared to pay out about $15 million in compensation for the failures on its XT network, and CFO Russ Houlden said over the nine months ended March 31, $9 million worth of rebates had been paid out, most of which came in the latest quarter.  

Telecom’s Gen-i unit posted a 1.7% decline in earnings to $58 million for the three month period, with data revenues on its telecommunications arm down 10% to $86 million.  

Australian unit AAPT posted an unchanged EBITDA of A$24 million as it slashed expenses 22% to A$237 million as revenue tumbled 20% to A$210 million.  

The Technology & Shared Services business unit made no profit in the period, from a $1 million profit in the three months ended March 31 in 2009.  

Telecom kept its third-quarter dividend unchanged at 6 cents a share, and announced  a new dividend plan to come into effect from the 2011 financial year.  

Under the new plan, it will pay a fully-imputed 90% ratio of adjusted earnings, chief financial officer Russ Houlden told media and analysts. The discount of the dividend reinvestment plan will be set to nil.

The new policy will help the company keep its A and A3 credit ratings with Standard & Poor’s and Moody’s Investor Services, Houlden said.  

Milford Asset Management’s Moore said the change in dividend policy was “not significant,” though the “share price could come back on it.”

The most important aspect of the new policy will be the imputation credit, he said.

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