Has Telecom New Zealand's Day Finally Come?

|
 |  About: Spark New Zealand Limited ADR (NZTCY)
by: Nima Baiati

I generally do not play telecoms. I much more prefer energy stocks and commodities, but there is something about this one that, like an old girlfriend, I keep wanting to go back to but maybe I should know better. The last time I invested in a telecom was back in 2005 when I was trading Telecom Corporation of New Zealand (NZT). Back then I ended up conceding defeat and took the loss. I have tried hard to erase the memory of that debacle of a trade but I got in around $26 a share just as the company decided it would play a game of "test the intestinal fortitude of traders". I acknowledged defeat at just over $19 a share. So what would make me seriously consider going back to the stock that broke my heart? She looks better than ever.

She's Lost Weight
Telecom New Zealand was always a massively bloated company. In 1987, Telecom New Zealand was spun-off from the New Zealand Post Office and became a stand-alone, state-owned enterprise. By 1990, following the sweeping trend of deregulation, the company was listed on the ASX and NYSE. At this point the company was jointly-owned by Bell Atlantic and Ameritech Corporation (OTC:AMTR). The middle-to-late 1990's saw the company grow from providing domestic and long-distance carrier service to launching XTRA, an internet ISP. Additionally, the company, alongside its interests in Australia and North America, began to lay fiber optic cable along the sea floor. By 2000, Telecom New Zealand had purchased the third-largest Australian telecom company, AAPT Pty. Further, by this time the company's Telecom Mobile service had grown to over 1,000,000 customers and the company was rapidly expanding its ISP network and began the switch to broadband. The company's "retail" division had grown to encompass everything from mobile phone service and sales, cable television service, internet and landline service to residential customers. The company provided the same types of services for business customers through its Gen-i division.

Next to the deregulation of the telecom industry in New Zealand that began in the late '80s local loop un-bundling brought the most change to the market. In 2006, the New Zealand Government announced that other telecoms would be able to use the wire connections that linked the local exchange to a customer's premises. Those wire connections were owned and operated by Chorus, a division of Telecom New Zealand. This came as a rather significant blow to Telecom New Zealand, I experienced the pummeling of the share-price first-hand. The company no longer had a monopoly on the telecommunications industry in the Land of the Long White Cloud.

In 2011, Telecom Corporation of New Zealand announced that it would spin-off into a separately listed company its infrastructure division, Chorus. On November 20, 2011 Chorus listed on ASX to light trading. Earlier in the year Chorus had announced that it had won the contract to build New Zealand's next generation fiber optic network. At divestiture, Chorus took control over all of the Telecom New Zealand's infrastructure including fiber optic and copper cable. Chorus itself is not listed on the NYSE.

Though Telecom New Zealand was now without its monopoly of the telecom industry in New Zealand, it was also a much leaner and nimbler company. Over the years, the company has lost market share (in 2010 the company's market share was down to 44.4% of the NZ market). Although this can be expected when a company transitions from having a monopoly on an industry to becoming one of its key players.

Today the company focuses on the retail and business consumer providing mobile, land-line, internet and cable service. It is being unencumbered of its infrastructure business that initially caught my attention. The hope being that the company could now focus on profitability without the burden of the financial costs of maintaining the infrastructure. Telecom New Zealand now leases, just like other companies, infrastructure from Chorus.

Why She Looks Good
Telecom New Zealand announces its half-year results on February 24. With that announcement investors and potential investors like myself will be looking for clarification on a statement made by Telecom New Zealand CEO Paul Reynolds (Reynolds is due to depart this year) back in December when he said, following the divestiture of Chorus, there might be "some form of capital management" in the future.

Current Analyst consensus is a price target of $10.14. On Friday, February 3 shares closed at $9.08. Current support is at $8.95 with resistance at $9.27. Shares have had a 52-week range of $6.99-$11.70. Trading volume has also been above average for the past week. Current analyst estimates for EPS is $0.76, the company has a P/E of 13.82.

With increased domestic competition, Telecom New Zealand stands at a crossroads. Will the company make the necessary cost reduction changes along with improving its chief criticism- that of poor customer service? I, for one will be listening attentively to the call later this month, and will consider going back to one of the ones that got away.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NZT over the next 72 hours.