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Current as of 18/09/14 06:40AM NZST

Value in Telecom despite drop in shares

By Eloise Gibson

Telecom has some work to do to soothe investors after a plunge in its half-year profits.

The telco's shares fell to their lowest point in more than a decade on Friday after chief executive Paul Reynolds announced a worse-than-expected half-year result. The shares closed at $3.95, dipping as low as $3.91.

First New Zealand Capital analyst Greg Main said Telecom shares still offered good earnings potential. But he warned that investors would not be comforted until they saw Reynolds' strategy for turning things around.

Net profit for New Zealand's largest listed company by revenue fell 12.6 per cent to $397 million for the six months to the end of December. It posted a 25 per cent drop in quarterly profit to $172m, slightly down on market predictions.

Adjusted net earnings from continuing operations for the half year were $397m, compared with $408m for the corresponding period a year ago, a decrease of 2.3 per cent.

Reynolds said in a statement to the stock exchange that falling revenue from mobile and retail broadband connections had off-set solid performances by the wholesale business and Gen-i accounts. The half-year result is the only he will post before Telecom splits into three business divisions at the end of March.

Operating revenue in New Zealand was $2095m for the half year, a decrease of 2.9 per cent on the same period last year.

Operating revenues increased for data revenue, broadband and internet and IT services. However, Telecom's revenues for interconnection, mobile and calling dropped, and local service revenue was flat.

Main said the result was in broadly in line with First New Zealand Capital forecasts. He said the question in most people's minds was how long it would be before the share price improved. Most estimates were around two years.

The trend for similar companies in Europe, facing a slide in earnings, such as the one Telecom was facing, was to bounce back, he said.

"You either believe the long-term story that they will be able to return to positive earnings momentum in the core New Zealand business, or you don't.

"I think most people's valuations assume that they will."

But he warned: "We're still waiting on Reynolds' strategic plan for how he's going to do it with regard to Telecom. I guess people want some greater comfort there is a plan that will stop the slide of earnings."

Main said there was still good earnings potential in the stock, but clarity from the board that it would not cut dividends would help give investors confidence.

"We assume that they will retain that dividend, but obviously that means they'll have to increase their payout, given that they've got declining earnings."

The challenges to Telecom's earnings were likely to continue; Main said a slower economy meant people might not take on broadband or mobile contracts.

In his statement to the NZX, Reynolds said that with the company close to finalising its undertakings on operational separation, its focus was on the fundamentals of the business.

Main said the market was "pretty comfortable" with Government-enforced plans to separate Telecom into three divisions. More details of the split would come through in the next result, when the company would have to report as three divisions. The telco's stocks slipped below $4 twice last month, with the dip blamed on uncertainty about whether the Government would accept the separation plan.

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