Calm year forecast for Telecom

A period of relative calm awaits Telecom in 2012, Craigs Investment Partners broker Chris Timms says.

"The near-term competitive, regulatory and technology environment looks relatively benign. A period of unprecedented structural change is behind Telecom. The next 24 months provide a window of opportunity in the eye of the storm before UFB gathers pace, potentially driving a period of renewed competitive intensity and repositioning."

With the watershed events of calendar 2011 behind Telecom, brokers were focused on the outlook for the new and skinnier version of Telecom without its access business, he said.

The next 18-24 months provided a clear opportunity to invest in Telecom, one reason being that behind the scenes, significant structural and regulatory change had occurred, and the biggest was structural separation.

Telecom was experiencing a cyclical low point for capital expenditure, Mr Timms said.

Ultra-fast broadband (UFB) deployment did not gather meaningful pace until the end of this year at best. Even then, the focus of the deployment was initially on businesses rather than residential.

There had been significant change since current chairman Mark Verbiest left the company as general counsel around 2008, Mr Timms said. However, there was likely to be plenty that remained familiar, assuring investors of progress from Mr Verbiest and the new board members rather than a lot of backtracking.

Telecom might face a less certain future as retail competition gradually increased under UFB, but it had an enviable starting point, with annual operating profits of about $1.1 billion, capex of $400 million and gearing - debt/operating profit - of just 0.7 times.

The target long-run gearing ratio was about 1.1 times, suggesting about $500 million of debt could be raised, Mr Timms said.

Craigs expected the first affirmative action from the board to be about shareholder distributions, with capital management likely to be a feature of the February interim result.

Options included special dividends, a return of capital or a progressive on-market buy-back.

The race to become the new chief executive of Telecom seemed wide open, with an equal chance of either an internal or external appointment to replace Paul Reynolds, who would leave by June.

"The challenge for the board is selecting a chief executive with the appropriate mix of skills. During this period of relative calm, Telecom arguably needs stability and a back-to-basics approach, while retaining the focus on cost and capital intensity."

At the same time, there were good arguments, on a longer term, for choosing a technology-savvy innovator and marketer with successful experience in change management and running a large organisation while at the same time being capable of motivating a shrinking workforce, he said.

The board would need to consider those issues, because there was a risk a new chief executive's bias would be towards growth rather than stability, and chasing growth could lead to sub-optimal capital allocation.

Craigs has a target of $2.30 on Telecom shares which are currently trading around $2.