Running The Numbers – Telecom New Zealand ($TEL.NZ)
Thursday, March 11th, 2010/*
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It has been a tough and challenging 2010 for Telecom New Zealand ($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.
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