Telecom payouts could be cut: broker

Telecom CEO Paul Reynolds. Photo / Dean Purcell

Telecom may be forced to cut its dividend payments, according to a hard hitting broker report written in the wake of Tuesday's rural broadband announcement.

Australian-based Deutsche Bank analyst Sameer Chopra cut his target price for Telecom from $2.40 to $2.10.

Telecom closed last night at $2.14.

He said the impact of this week's Government announcement on providing broadband to rural areas and the XT outages had prompted Deutsche Bank to cut the company's dividend estimates by 15 per cent for the next financial year.

"We expect Telecom will need to lower dividends in FY 2010 to 21c and thereafter to 18c as earnings deteriorate," said Chopra.

"The share price has already adjusted downwards to reflect the market's lower dividend expectation and we are of the view that 9 per cent yield is required to compensate investors for the risks associated with [the Government's fibre roll-out]."

Chopra said the price target reduction was based on the "most probable outcome" of Telecom not participating in the $1.5 billion fibre roll-out to metropolitan areas.

Telecom is one of a number of firms hoping to build all or parts of the new fibre network.

On Tuesday Communications Minister Steven Joyce announced finalised plans for bringing high-speed broadband to rural consumers.

Under the proposal the telecommunications industry will chip in roughly $250 million to a development fund over a six-year period - $42 million a year - with Telecom meeting about 67 per cent of the cost.

Telecom receives approximately $23 million from other telcos to meet the $70 million-a-year cost of providing basic phone and dial-up internet to 58,000 non-commercially viable customers.

The new system would create a transparent, contestable fund, but Telecom said it would hit its earnings to the tune of $56 million a year for three years, made up of $33 million it would need to chip into the fund plus $23.5 million it previously got from other industry players.

Craigs Investment Partners analyst Geoff Zame already expected Telecom to cut its 2011 dividend from 24c to 22c.

First NZ Capital's Greg Main said the announcement of the rural broadband initiative - ahead of disclosing frontrunners for the fibre roll-out - was a signal that Telecom's non-compliant nationwide bid may have been knocked back.

Telecom submitted two nationwide proposals - one complying with the Government's tender guidelines, the other non-compliant bid building on the company's current fibre-to-the-node programme and widely tipped to contain an element of rural coverage.

All the fibre roll-out proposals received by the Government are commercially confidential.

Yesterday Joyce said the Government "isn't trying to head down an anti-Telecom path. We're just trying to get the best broadband."

While First NZ Capital has reduced its price target from $2.47 to $2.39, Main said the brokerage retained its view that given the risks of the fibre roll-out bypassing Telecom, a more attractive entry point would be $2 or below.

Zame also cut the target price for Telecom from $2.32 to $2.19. He said this reflected earnings guidance from Telecom, XT outages and lower Southern Cross dividends.

Main has left his dividend forecast for the 2011 financial year unchanged at 20c but said there was still a risk of further cuts. He expects more clarification on dividend policy at either the third quarter results on May 7 or an investor briefing later in the month.

HANG UPS

Challenges for Telecom:

* Series of outages at XT mobile network since December.
* Rural broadband plan, expected to cost it $168 million.
* Danger of missing out on role in the Government's $1.5 billion fibre network plan for metropolitan areas.