New Zealand’s largest company Telecom New Zealand (TEL.NZ) closed yesterday at NZ$2.23 – TEL.NZ’s lowest closing price since the early 1990’s.  We decided to have a look at TEL.NZ with the Valuecruncher interactive tool to place an estimate on the intrinsic value of the company using a discounted cash flow valuation.

Valuecruncher valuation model of TEL.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$2.41 for TEL.NZ.  This is a current valuation (an estimate of intrinsic value) not a target price.  This valuation is 8.1% above the current share price of NZ$2.23.

Assumptions

In 2008 (June balance date) TEL.NZ had revenues of NZ$5.673 billion and an EBITD margin (profits) of 32.15%.  Reuters aggregates 10 analysts covering TEL.NZ and these have mean estimates of 2009 and 2010 revenues of NZ$5.668 and NZ$5.652 billion respectively.  For this analysis we have used revenues of NZ$5.65 billion in 2009, NZ$5.65 billion in 2010 and NZ$5.70 billion in 2011.  We have forecast EBITDA margins falling from 31.5% in 2009 to 30.5% in 2011.  We have estimated capital expenditure of NZ$1.25 billion in 2009 to a long-term (terminal) number of NZ$1.05 billion.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Other Model Assumptions:

Discount Rate: 9.5%.  PwC in their New Zealand cost of capital report calculates TEL.NZ WACC at 9.6%.

Terminal Growth Rate: 2.0%.  The New Zealand economy has grown at an average rate of 2.6% over the last five-years.  We see TEL.NZ growing more slowly than the New Zealand economy moving forward.

Our analysis incorporates the cash and debt on the TEL.NZ balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis and assumptions the current share price looks a slight discount to intrinsic value.  Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Telecom Corporation of New Zealand (TEL) is New Zealand’s largest company (by market capitalisation). TEL is facing a range of challenges in the New Zealand market as it begins to operate in a more open regulatory environment. We decided to have a look at the company using the Valuecruncher interactive tool.

TEL Valuation

Our assumptions of revenues for the next three years are NZ$5.625 billion in 2008 decreasing to NZ$5.575 billion in 2010. We have projected EBITDA margins decreasing from 33.5% in 2008 to 31.5% in 2010.

We have used a terminal growth rate of 1%. Our view is that TEL will start to see modest growth post 2010 and 1% is a reasonable estimate. This assumption has a significant impact on the valuation. If you believe TEL has better future prospects – this will positively impact the valuation.

We have used a WACC (discount rate) of 10 %. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). PricewaterhouseCoopers December 2007 cost of capital report gives TEL a calculated WACC of 11.3%. In our opinion this is too high. In 2004 PricewaterhouseCoopers calculated a TEL WACC between 9.8% and 10.5% (with 10.1% as the point estimate). In our opinion this 2004 analysis appears more reasonable. The December 2007 cost of capital report gives a New Zealand market WACC of 10.3% – TEL having a WACC 1% higher seems wrong.

We used a terminal capital expenditure number of NZ$750 million. In our opinion capital expenditure should stabilise around this number.

TEL Valuation

Our analysis incorporates the cash and debt on the TEL balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of NZ$3.40 which is 8.85% below the current share price of NZ$3.73.

Based on our analysis, TEL shares look expensive. Our key assumptions are around terminal growth and WACC (discount rate). Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.