Telecom announced a profit decline yesterday of 34% to $149 million for its first quarter trading, in line with forecasts and expectations, as it enters what will be a crucial seven-month period of capital expenditure.
Over two years, Telecom is investing $574 million its new W850 mobile network, wide-band CDMA technology using a frequency of 850MHz.
It is having a phased launch from this month with the start of inbound roaming services as well as a pilot programme, with a full-service launch by June next year.
ABN Amro Craigs broker Chris Timms said during the next seven months Telecom would want to be able to go to the market with positive announcements about implementation of its W850 network, to instil confidence in the company, and not become bogged down with delays or spending beyond its budget.
"There's a lot riding on this [W850 roll-out]. They have got to get this right to stem the tide of clients going across to other providers.
"Just as important as the capital [spending] is the building up [of] the credentials of the new management," Mr Timms said.
Telecom's revenue for the quarter was up 2.3% to $1.44 billion, with total expenses up 5% to $977 million, while the firm's earnings before interest, tax, depreciation and amortisation of $466 million were down 3.3% on last year.
Capital expenditure was up 63% to $340 million.
As expected, the $574 million capital expenditure programme had some negative effect on dividends, with Telecom dropping its 7c per share payout from a year ago to 6c yesterday, and without tax credits, meaning shareholders will have to pay around 20% tax on the 6c dividend.
Mr Timms reiterated that during a period of no growth in share value, dividends for shareholders would have to be maintained as an incentive to stay with the company.
During the past year, Telecom's share price has hit a high of $4.46 in December and a low of $2.21 at the end of October, shedding about 50% of its overall value over the period.
Telecom has lowered its after-tax forecast three times during the past six months. Telecom stock was initially sold off aggressively after the announcement, opening down 7c or 3% at $2.29, then rallying to $2.22.
However, this was in line with the SE50 index, which was trading down 1.9% after opening.
"Telecom is going to remain under pressure in its traditional revenue areas - fixed line and mobile - with increasing competition," Mr Timms said.
Until the W850 network was fully implemented, its share price was likely to remain flat, he said.
• Forsyth Barr maintains a hold recommendation on Telecom stock, with a 12-month price target of $3.86, while ABN Amro Craigs maintains a hold recommendation on Telecom stock with a 12-month price target of $2.25.
