KEY POINTS:
Telecom's disappointing annual result has prompted analysts to downgrade their forecasts for the company.
On Friday, New Zealand's largest listed company reported a net profit of $3 billion for the year, boosted by the sale of the Yellow Pages directories business for $2.1 billion.
Adjusted to exclude one-off costs, the company's net earnings were $995 million, 16.5 per cent higher than last year's $820 million.
But the improved profit came from lower tax and lower depreciation charges.
First NZ Capital analyst Murray Brown cut 15 cents off his target price for Telecom, taking it to $4.75 - 9.2 per cent higher than yesterday's closing price of $4.35.
Brown said Telecom's profit guidance for the current financial year was lower than expectations and the company's outlook continued to be clouded with regulatory decisions.
These included the final plan for the operational separation of Telecom, pricing for local loop unbundling and naked DSL services, and a review of the mobile market and telecommunications service obligations, said Brown.
The Government last year announced sweeping regulatory changes to the telecommunications industry aimed at opening up the market to greater competition and bringing down phone and broadband costs.
"A new CEO and potential management changes add to the mix," Brown said.
Guy Hallwright of Forsyth Barr said a "murky" outlook for the phone company led to reduced earnings forecasts for the current year, down $10 million to $700 million. He also cut the target price 5 cents to $4.60.
"Although the share price is about 6 per cent below this, we are maintaining our 'Hold' recommendation as we believe there are downside risks in the near term, with the newsflow likely to be predominantly negative over the next six to 12 months," said Hallwright.
He said Forsyth Barr's valuation incorporates an assumption of continuing declines in returns on investment and margin pressures over the next few years.
"Notwithstanding the prospect of network separation, we believe Telecom remains well positioned to remain the predominant New Zealand telco in the longer term, given its existing customer relationships, scale advantages and IT capability," said Hallwright.
RATINGS
First NZ Capital - Neutral - $4.75
Forsyth Barr - Hold - $4.60
Credit Suisse - Neutral - $5.47
ABN Amro - Hold - $4.29
UBS - Neutral - $4.25
GS JBWere - Hold - n/a
