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.

Telstra ($TLS.AX) is Australia’s largest telecommunications company. $TLS.AX is listed on the ASX and NZX exchanges. The current share price is A$3.71 - the 52-week range has been A$4.95 to A$3.36. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $TLS.AX with interactive assumptions

Valuecruncher produces a valuation of A$3.57 for $TLS.AX. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 3.8% below the current share price of A$3.71. All of the figures below are in Australian dollars (A$).

Assumptions

• Revenue: Reuters aggregates 10 analysts covering $TLS.AX and the mean estimates of 2009 and 2010 revenues are A$25.5 billion and A$26.1 billion respectively. For our analysis we have used A$25.25 billion in 2009, A$26.0 billion in 2010 and A$26.5 billion in 2011.
• Profitability: We have used an EBITDA margin of 41.5% flat to 2011. Reuters has $TLS.AX‘s EBITD margin at 41.7% last year and averaging 43.9% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of A$4.5 billion in 2009 then A$4.0 billion in 2010 and 2011 then A$4.5 billion per annum moving forward.
• Discount Rate: 9.0%.
• Terminal Growth Rate: 1.0%.

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

Play with our assumptions – what does your analysis say?

Disclosure: None