It has been a tough and challenging 2010 for Telecom New Zealand ($TEL.NZ) – New Zealand’s largest listed company. $TEL.NZ is trading close to a 52-week low at NZ$2.24. There has been widespread outages on their mobile XT network and yesterday a group of New Zealand entrepreneurs (including Valuecruncher investor Lance Wiggs) announced a new international broadband initiative to complete with the Southern Cross Cable Network (of which $TEL.NZ is the largest shareholder). Time to look at some valuation numbers – where is $TEL.NZ coming out?

Valuecruncher Interactive Analyst Report For $TEL.NZ

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of NZ$2.70 for $TEL.NZ – 20.5% above the current share price. We see $TEL.NZ undervalued at the moment. But how about compared to a peer group?

Comparator Analysis

I am going to look at only one of the metrics we use at Valuecruncher – EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $TEL.NZ is trading at 3.7x ($TEL.NZ is being valued at 3.7x last year’s profit at the EBITDA line). A dollar of $TEL.NZ EBITDA is worth less than a dollar of $T, $VZ, $VOD.O or $TLS.AX EBITDA. $TEL.NZ is a smaller scale but broadly similar business – $VOD.O is perhaps an outlier.

If we raise the $TEL.NZ EV/EBITDA multiple to the average of $T, $VZ and $TLS.AX (4.7x) then this gives a share price of NZ$3.17 – 41.5% above the current share price. This valuation is in line with our DCF analysis – but even higher.

Summary

Based on our DCF valuation – $TEL.NZ looks undervalued. Looking at some comparators – the market is valuing $TEL.NZ lower compared to the peer group. $TEL.NZ looks cheap at current prices – even with the challenges the business is facing.

Disclosure: no positions.

AT&T has released its second quarter results announcing revenues of $61.6 billion and operating income of $12.5 billion for the first half of the year. This result was dominated by strong growth in wireless revenues (up 15.8% in the second quarter) and speculation on the impact of the 3G iPhone on AT&T’s third quarter numbers.

AT&T’s current price of $30.17 is at the bottom of their 12 month range ($29.72 to $42.97) so we decided to apply our discounted cash flow valuation tool to AT&T. Utilising analyst projections, AT&T’s MD&A and our own analysis we arrive at a valuation of $39.25 for AT&T, a 30% discount to the current share price.

Valuecruncher interactive valuation of AT&T and assumptions.

Supporting points for buying AT&T at $30 per share:

• 18 of the 28 analysts aggregated by Yahoo Finance rate AT&T a buy or strong buy.
• Analysts mean target price for AT&T is $41.31a 37% premium to the current share price.
• A P/E ratio (ttm) of 13.40 at the lower end of the 5 year range (10.50 – 22.10).
• AT&T’s exclusive iPhone partnership with Apple and the recently released 3G iPhone selling at twice the rate of the original iPhone.

Downside considerations:

• The impact of AT&T’s estimated iPhone subsidy of $300 per device on revenues and margins.
• AT&T’s strong wireless growth is offset by declining voice revenues (down 7.8% or $1.6 billion in the six months to 30 June 2008).
• What are AT&T’s long-term growth prospects beyond the Apple iPhone deal?

Despite these downside risks AT&T looks attractive at a $30 share price the question is whether the market will recognise the discount AT&T appears to be trading at.