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Telecom Corporation of New Zealand (Telecom) recently announced the sale of the AAPT assets to TPG Telecom for $450 million. While the decision to divest the business was not surprising, what was perhaps a pleasant surprise was the price extracted, as the market consensus prior to the transaction was for AAPT to fetch around $300 million. The question now is what Telecom will do with the cash from the sale, and this will probably be more fully answered at the company’s upcoming first-half results to be unveiled later this month.
We believe the deal is yet another important step on the turnaround path that the company has embarked upon — one that is set to reinvigorate earnings growth over the next few years in our view.
Telecom still has a 10 per cent stake in mobile business Hutchison Telecommunication Australia, which could be on the block, as could the 50 per cent interest in cable link provider Southern Cross Cables and the 60 per cent interest in the Cook Islands’ biggest phone and internet phone provider. All these non-core holdings could well generate proceeds of up to $NZ450-500 million, thereby, deleveraging the balance sheet and raising the prospect of further capital returns to shareholders.
Just as importantly, Telecom has suffered from wandering somewhat aimlessly from a strategic perspective in our view. The AAPT divestiture, together with the potential sale of the other non-core interests mentioned above, will further restore much-needed focus on, as well as facilitate investment in, the company’s higher-returning core assets in New Zealand.
In the meantime, management is actively taking costs out of Telecom’s businesses in a bid to return earnings back on a growth trajectory.
Telecom’s stock price has performed solidly, edging up 8 per cent and 11 per cent over the past six and 12 months, respectively. The gradual ascent shows that investors are warming to the recovery potential in New Zealand’s largest telco and the potential upside from the deleveraging that is occurring on the balance sheet.
We continue to be encouraged by the turnaround that is taking shape at Telecom Corporation of New Zealand. The company is sensibly reducing costs, exiting non-core business stakes at full value, and reinvesting in its higher returning assets at home.
This is beginning to have a noticeable impact on the company’s prospects, balance sheet and investor sentiment. The shares currently trade on around 13 times fiscal 2014 consensus earnings estimates which we regard as a modest valuation, and come with a forecast un-franked dividend yield of almost 7 per cent. Consequently, we believe the stock is worth buying at current levels.
Greg Smith is the head of research at Fat Prophets sharemarket research.
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