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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Telecom New Zealand


Telecom New Zealand (TEL:ASX) 2006-04-20

The big Telecom companies like AT&T, Verizon, Comcast, BT and Vodafone really dont interest us, as investments at the moment.
The growth in fixed line and mobile phones penetration and useage in their traditional markets is almost over.
Yes people will upgrade and replace their existing phones, but we dont  think the growth is there.
In fact, penetration is almost up to 100%.

But, there are a few lesser known companies that do interest us.
For seekers of high yields,Telecom New zealand is worth looking at, right now.
Telecom New Zealand (Telecom NZ) is New Zealands primary telecommunications provider.
Its activities include local, national, international and mobile telephone services.
The company is also moving into online internet services and value added data transmission services.
Telecom NZ  is the major telecom company in the New Zealand market and it has expansion opportunities in Australia.
 A diverse product range across the telecommunication spectrum boosts earnings reliability.
Top line growth is only moderate however and possible regulatory changes to promote competition
in the New Zealand market place are also somewhat of a risk.
The AAPT acquisition put a strain on the companys balance sheet, requiring a substantial increase in debt. Now reducing debt levels, reduced interest expense is improving profitability.
Growth is being pursued in new areas to offset the trend away from fixed line services.
 Mobile market share gains are coming through renewed promotional activity, such as the refurbishment of retail stores and the establishment of new ones, expansion of the range of mobile devices on offer and the launch of third generation services. In broadband, growth is being pursued through the roll-out of the network.
In IT Solutions, acquisitions are boosting capacity. Gen-I and Computerland are assisting revenues in recent results.

Telecom NZ reported a net loss of NZ$466.0m for the half year ended 31 December 2005 compared to the profit of NZ$413m in the same period of 2004. The result reflects an abnormal impairment charge of NZ$897m recognised at 31 December 2005 to write-down the carrying value of Telecom NZ's Australian Operations, based on revised forecast future cash flows.
Excluding the impact of abnormal items, adjusted net earnings were NZ$395m, representing a 0.8% decrease from the previous period.
Diluted EPS was 23.8 NZ cents compared to 21.1 NZ cents last year.
Net operating cash flow was NZ$797m compared to NZ$813m last year.

The 2nd quarter dividend declared was 9.5 NZ cents, plus a special dividend of 5.0 NZ cents, payable on 10 March 2006.

Telecom NZ is facing competition nowadays, but remains the largest fixed line operator in the country.
This may suggest unexciting growth prospects but itdoes present an opportunity for very steady cash flows.
An additional attraction is that it has decided to pay out 85% of earnings as dividends! This will give a yield of almost 10%.
Telecom NZ's shares are well off their highs right now and look good value at their current price.
The New Zealand dollar has been on a nose dive since the beginning of 2006,against the US dollar, Australian dollar, Euro and Sterling.
Investors buying into these shares with any of these currencies could stand to make additional gains due to currency appreciation, as we believe the New Zealand dollar has been over sold.

There is an added attraction to Telecom NZ at the moment. It could be seen as a takeover target. Justin Cameron of Credit Suisse First Boston (CSFB) cites factors such as the telecom's cash flow and its under leveraged balance sheet. Due to this CSFB has increased its share price target for Telecom NZ to $NZ6.30, an increase of 9%. 
In light of all this, Telecom New Zealand looks like a high grade investment that pays a great yield. More than virtually any junk bond!

Buy Telecom New Zealand (TEL:ASX) up to $4.90 This could be a great call.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.