Telecom New Zealand
Valuecruncher has placed a value on Telecom of $4.47 with a range of $3.71 to $5.26 - driven primarily by revenue and EBIT margin sensitivities. This is slightly below Telecom’s current trading price of $4.50.
Yesterday, 28 November 2006, Parliament’s finance and select committee released the telecommunications amendment bill, recommending that Telecom separate into three operational business units: fixed network services, wholesale, and retail. The regulations surrounding the unbundling of Telecom’s bitstream service were also included in the amendment with recommendations that Telecom face limited competition only three years after the implementation of the Bill. In other words, Telecom will be facing full exposure to competition in the first three years of unbundling their network. So what does this mean for Telecom?
Using the Valuecruncher model, we have come up with a value range for Telecom. For this analysis we have used figures from pre-2006, that is, starting at 2005. The annual figures from the 2006 annual report were not, in our opinion, representative of the long-term nature of Telecom’s operation.
The key assumptions are outlined as follows:
Revenue Growth
Revenues grow at 3% p.a. This is down on the growth seen in the 03/04 and 04/05 periods of 3.80% and 7.72%, respectively, but is in line with the forecasted terminal growth of 3%. This assumption is based on Telecom’s ‘utility-like’ characteristics, which suggest that its long-term growth will follow the economy’s average long-term growth. Under the conditions set in the Telecommunications Amendment Bill, it is unlikely that Telecom will see revenues growth above 3%.
EBIT Margins
EBIT has been projected to decrease by a total of 25% over the next three periods (2006, 2007, and 2008). Under increased competition and regulatory intervention it is likely that Telecom will face increasing pressure on their margins. In 2005, Telecom’s EBIT margins were 28.3% of revenues. We have forecasted these to decrease to 25%, 22% and 19.5% over the next three years.
Discount Rate (WACC)
The discount rate used in the analysis is 11.0%.
Telecom NZ Valuation 29 November 2006