Broker picks Telecom as 'world-class yield story'

By PETER GRIFFIN


Telecom will post a first-half profit of about $368 million for the six months to December 31 and deliver long-expected news of a dividend increase on February 5, says broker ABN Amro.

In the same period the previous year Telecom's profit was $301 million.

Long-term forecasts for Telecom have also been boosted as a result of the telecommunication commissioner's shock recommendation to the Government not to open Telecom's network to competitors.

"We have been able to reduce our provisions for local loop unbundling in our forecasts, pushing up the cash flows and the discounted cash flow valuation," wrote ABN Amro analyst David Boyce in a report.

Boyce described the commission's recommendation, which limited unbundling to a narrow set of internet services and closed the scope of an earlier report, as "a major turnaround".

Telecom's competitors would pick up market share in the broadband market, but Telecom's revenue could well increase as it starts wholesaling more access services to its rivals.

Telecom's efforts to pay down debt using free cash flow would lead to an increase in the quarterly dividend to 9.25c, predicted ABN Amro.

Telecom's dividend has been set at 5c per quarter for the past few years as the company focused first on expensive network investment then on paying down debt to strengthen its balance sheets and keep credit ratings firms happy.

Returning more profits to shareholders through a dividend increase would "dramatically rerate Telecom as a world-class yield story", said ABN Amro, which has a target share price for Telecom of $6.23.

Telecom shares closed on Friday at $5.52.

Telecom's revenue for the six months to December 31 rose only 1 per cent to $2.63 billion, according to ABN Amro, which is also forecasting a 1 per cent increase in revenue for the full year to June 30 to just over $5.2 billion. Operating costs are forecast to increase 1.4 per cent. Earnings before interest, tax, depreciation and amortisation would increase 0.5 per cent to just over $2.3 billion.

For the full year a profit of $701 million is expected, which includes the $28 million Telecom pocketed from the sale of its 12 per cent stake in Sky TV last year but also a $110 million charge for the write-down in value of its aging 025 network, which still supports 795,000 customers.

The half-year forecasts for Telecom show some marked drops in international calling revenue, down 18 per cent.

Local calling was down 6 per cent.

Falling international call rates have hit the revenue of most big telcos but have been offset by falling costs.

On a national level, competitors such as ihug and TelstraClear are understood to have picked up more calling business.

"We expect national and international calling to reverse the downward trend in [the second quarter] as Christmas volumes temporarily halt the substitution by mobiles, email and text messaging," wrote Boyce.