Macquarie upgrades Telecom to outperform

Macquarie Equities has upgraded its recommendation on Telecom to "Outperform" from "Neutral", saying the stock looked cheap despite ongoing pressure on earnings.

Telecom posted a $199 million first quarter net profit on Friday and said it remained comfortable with annual consensus forecasts of $886 million, down about 8 per cent on its 2005 profit.

Telecom remained a cheap stock with defensive characteristics in an increasingly uncertain market, and momentum at its New Zealand business continued to improve, Macquarie analysts said.

"The risks that have overhung the stock have not entirely disappeared, but in our view the balance has swung in favour of a positive relative outcome."

Macquarie cut its forecast for annual net profit by 1.8 per cent to $860 million on the back of risks at Telecom's struggling Australian unit AAPT, with the cost of access to wholesale services provided by Australia's biggest phone company, Telstra, expected to rise from A$500 million ($542 million) a year.

"In our view, (Telstra's) attitude to wholesaling increases the likelihood that Telecom will reach a deal (almost certainly with Optus) to sell AAPT."

In mid-afternoon trading Telecom shares were down 4c at $5.897, below Macquarie's $6.40 target.

- REUTERS