Morningstar's Andrew Doherty says telecommunications
companies offer great opportunities at the moment. Photo
Telecommunications stands out as offering the greatest
opportunities for share purchases this year, Morningstar head
of equities Andrew Doherty says.
Two major themes were playing out. Regulatory wholesale
pricing uncertainty was weighing on Chorus while Telecom
would continue to defend market share from a larger
competitor - Vodafone - in the retail sector, he said.
''For Chorus, we expect discussions between industry players
and the regulator to lead to a better outcome in the final
decision, as was the case for wholesale copper price.
However, the final decision is not expected until mid-2013,
which will likely prevent Chorus' share price from converging
on our fair value in the near-term.''
Chorus was Morningstar's one positive recommendation but
regulatory changes created a highly uncertain environment.
In the retail market, Morningstar expected competition to
increase, Mr Doherty said.
Telecom's market share in the fixed line business had been
pressured for some time and that was expected to continue
this year. The acquisition of TelstraClear by Vodafone in
July had strengthened Vodafone's competitive position.
While it would take time to integrate the two businesses,
Morningstar expected Vodafone to benefit from increased scale
in the future, he said.
''In our view, rationalisation of costs could flow through to
lower retail pricing and a more competitive market. While
Telecom's return is likely to be pressured in the near-term,
there is no change to our positive long-term view.''
Upfront capital costs, coupled with low population and
dominant positions by existing players, acted as barriers to
entry. Telecom was expected to compete more aggressively in
the mobile market. Higher costs from handset subsidies,
mainly in smartphones, and value included in post-paid plans
could reduce margin in the short-term, Mr Doherty said.
By putting smartphones in the hands of users, the strategy
was expected to lift data usage and raise revenue over the
Rollout of the 4G network was not immediate with auction for
additional spectrum scheduled for later this year, he said.
Trials were under way and Telecom was expected to launch its
services later this year or early next year.
Healthcare was one of the most expensive areas of investment,
Mr Doherty said.
The healthcare sector consisted of three companies - Ryman
Healthcare, Fisher & Paykel Healthcare and Ebos.
Morningstar was predicting good earnings growth from each
business but their prices were trading above fair value
The consumer sector was also expensive, he said. The sector
encompassed retailing and other discretionary industries such
as gambling and media. Overall, consumer spending in New
Zealand remained lacklustre despite low interest rates. High
debt levels racked up by consumers during the boom years of
2002-08 stifled household balance sheets.
''As a result, consumers have imposed their own austerity
The recent surge in house prices could provide a fillip to
consumer spending, Mr Doherty said. However, he expected
little house price appreciation in the near term,
particularly given expensiveness relative to global peers.
Any further rate reductions were unlikely to meaningfully
improve housing affordability.
Against that economic backdrop, he expected discretionary
retailers to struggle, while retailers trading in food and
other essentials should fare better.
The slowdown in discretionary spending was also hurting
gambling and media companies, Mr Doherty said.
SkyCity Entertainment, which was the only listed casino
company on the NZX, was bucking the trend by winning market
share from pubs and clubs. Also, it had been successful in
attracting a high number of international VIP players to its
Sky Network Television was performing much better than its
free-to-air counterparts, which were more reliant on
advertising revenue. Sky TV's subscription-based business
model was proving to be ''somewhat immune'' to economic
headwinds, he said.
''There are few buying opportunities in the New Zealand
market following a strong run last year. The market is very
close to fair value.''
Most stocks were in the hold zone and Morningstar was finding
outright buy and sell calls hard to come by, Mr Doherty said.
Given depressed interest rates globally, quality companies
providing sustainable and above average yields would continue
to be popular for a while yet, he said.
Chorus, accumulate, fair value $3.80.
Nuplex Industries, hold, fair value $3.50
SkyCity Entertainment, hold, fair value $4
Sky Network TV, hold, fair value $5.50
Telecom NZ, hold, fair value $2.50