Telecom New Zealand is a telecommunications services provider based in NZ. It shed its traditional network infrastructure in 2011 via a demerger of Chorus and its assets now encompass a nationwide mobile network, PSTN equipment for fixed-line calling, and various international assets (AAPT, a fixed IP network in Australia, a 50 per cent stake in the Southern Cross international cable).
At the time of the first-half fiscal 2013 profit release, the company advised it would incur some material one-off costs in the second half of the fiscal year for structural and portfolio changes to make its business more competitive.
Recently, management announced Telecom New Zealand now expects to incur a one-off restructuring cost of $NZ70 million ($58 million) to $NZ80 million in fiscal 2013, primarily to reset the scope of its networked IT and managed solutions business (Gen-i) while also downsizing corporate functions.
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While the overall impact of these changes remains uncertain, the company has indicated that the initiatives will reduce annual payroll costs by between $NZ90 million and $NZ110 million. Further restructuring is on the agenda. Telecom New Zealand has stated that it will reduce its head-count by about 15 per cent by the middle of this year.
Outlook
While the overall financial impact of the new strategy is not yet certain, we are encouraged by the bold moves already set in motion. The company operates in an extremely fierce telecommunications space. We see significant merit in management's strategy to first optimise the cost structure and get into ''fighting weight''.
In the meantime, the company has maintained its adjusted EBITDA guidance of $NZ1040 million to $1060 million for fiscal 2013 (excluding the one-off restructuring costs mentioned above), an encouraging sign that the core business is not being neglected. Furthermore, Telecom New Zealand boasts a solid balance sheet with a net-debt-to-EBITDA of merely 0.9 times.
Price
Telecom New Zealand's stock has been a steady performer on the Australian bourse, rising 11 per cent and 8 per cent over the past six and 12 months, respectively. However, these figures are downright pedestrian when compared with the performance of Telstra (19 per cent and 42 per cent over the same periods).
Worth Buying?
We believe Telecom New Zealand is in the relatively early days of a turnaround. Its stock is trading at 14.3 and 13.7 times consensus earnings estimates for fiscal 2013 and fiscal 2014, respectively. These multiples are notably below those of Telstra, while its 6.3 per cent yield is likely to attract increasing interest. Therefore, we believe Telecom New Zealand is worth buying.
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