A broker's view: Telecom

GRANT DAVIES
Last updated 05:00 15/06/2013

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OPINION: Company: Telecom Corporation

Sector: Telecommunications

Overview: Telecom is the dominant retailer in the New Zealand telecommunications market. Its traditional dominance of the home phone market is unlikely to be challenged, but with growth for these connections limited it has refocused its efforts on the more competitive markets for internet and mobile connections for which it holds market shares of 47 per cent and 36 per cent respectively.

Pros: Telecom has enviable market shares in all key segments and has economies of scale that should allow it to maintain margins in the face of increased competition. Although there has been an increase in the number of smaller operators, the recent purchase of Telstra NZ by Vodafone has consolidated the market into an effective duopoly. Revenue is expected to be flat for the foreseeable future, with increases in profitability to be led by cost reductions. Regulation has been a bugbear for Telecom, something it will be glad to have put behind it and that could now benefit Telecom as the current draft decision by the Commerce Commission will substantially reduce copper network costs and could result in increased returns to all retail providers. Telecom also owns the Southern Cross Cable and is currently tendering with Vodafone to build another trans-Tasman cable.

Cons: Telecom's large market share is being slowly eroded by a slew of smaller operators and the company is aiming to stabilise its market share at current levels. The inevitable shift from traditional fixed home lines to mobile and broadband means Telecom's home line cash cow will not last forever. Telecom will have to replace the revenue currently generated by home lines by shifting focus to the more competitive mobile and internet markets. It could also face difficulties responding to changes in technology or technology obsolescence in comparison to its smaller and more nimble competitors.

Price performance: A 20-year chart makes dismal reading for Telecom investors, with shareholders returns obliterated by years of regulation. Performance has improved of late, with the share price gaining 21 per cent in 2011 and 10 per cent in 2012, before giving back 4 per cent in 2013 to recently trade at $2.18.

Investment outlook:
Cash-flow generation is strong and a gross dividend yield of approximately 10 per cent is excellent and should be sustainable. Telecom, at current levels, represents good value for investors looking for a blue chip stock.

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*A Broker's View is written by Grant Davies, NZX Associate Advisor, employed by Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice.

- BusinessDay

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