KEY POINTS:
Telecom is expected to report lower full-year earnings on Friday as it continues to operate in the shadow of Government regulatory reform.
Forsyth Barr's Guy Hallwright said a continuation of its performance to date would see fourth-quarter earnings of $175 million, excluding the Yellow Pages earnings and sale gains, and $775 million for the year, excluding the Yellow Pages.
Last year Telecom reported net earnings of $820 million, excluding abnormal items, including the $1.3 billion Australian assets writedown.
Hallwright said Telecom would not be in a position to reveal much in the way for forward-looking guidance because many of the regulatory changes affecting the company have yet to be introduced.
However, he said the phone company would this year start to see the impact of opening its network to rivals - local loop unbundling - when trials in five of its exchanges began in September.
"That's probably not enough to have too much of an impact but progressively through the second half of the financial year it might start having more of an impact," Hallwright said. "Where the operational separation could affect things is costs, because if they incur substantial cost to do that or structural separation that's going to affect next year's numbers."
The Government is advocating operational separation for Telecom but Telecom prefers structural separation - the hiving off of its network assets into a separate company.
Communications Minister David Cunliffe confirmed earlier this month that his final determination would come in September, but could be earlier.
Hallwright expects Telecom to brief the market later in the year or early next year on the company's outlook.
JPMorgan analyst Laurent Horrut agreed that the 2007 results would not be a surprise and merely a "tick in the box" with the most interesting discussions being the guidance for the coming financial year.
As well as the regulatory changes there would be some uncertainty around the impact of lost earnings from the sale of the Yellow Pages business and gains from purchase of Australian network company PowerTel, said Horrut.
Telecom sold its directories business to CCMP Capital Asia and Teachers Private Capital for $2.24 billion in March and spent A$357 million ($398 million) on PowerTel the following month.
JPMorgan at present has a target price of $5.12 for Telecom, 9 per cent higher than its Friday closing price of $4.70.
"We think that compared to other telco stocks in the world Telecom New Zealand is at the moment quite cheap, more than reflecting the regulatory issues of the moment and we're quite happy to have it on the 'buy'," said Horrut.
"Underpinning this recommendation is also the belief that, compared with other markets in the world, we see New Zealand as quite a challenging market from a competitive environment point of view - both on the wireless and fixed-line side.
"We think it is quite tricky for new entrants to come in and make a business case work ... "
TELECOM ANALYST RECOMMENDATIONS
Citigroup - $5.00 - Buy
Forsyth Barr - $4.50 - Neutral
JPMorgan - $5.12 - Buy
First NZ Capital - $4.90 - Neutral
GSJBWere - n/a - Sell
ABN Amro - $4.81 - Hold
