“Telecom Corp. of New Zealand (NZT 7.61 NYSE – yield 11.30%), whose shares trade in the U.S. as American Depository Securities (ADS), each of which represents five shares of NZT as traded on the Wellington, NZ Stock Exchange, currently yields [over 11%], which is at the high end of what the shares have ever yielded in NZT’s 19-year history as a publicly traded company. As we’ll discuss below, other price ratios are also at tantalizing historical lows. Needless to say, you don’t see such extremes unless the company is under stress. Price competition, regulation, large capital expenditures to beef up both infrastructure and the range of products offered have combined to make investors wary of NZT. ...
“Telecom New Zealand began life as a government monopoly, and separated from the National Postal Service in the late 1980s. ... In 1990 Ameritech and Bell Atlantic, two American Baby Bells, partnered to buy Telecom New Zealand, though a paternalistic state influence persisted: local calling would remain free to residents. In the following year, shares of NZT began trading locally. Soon government regulators sought to inject competition, which started in the same year the two American telecoms took control of NZT. First came TelstraClear, a division of Australia’s dominant telecom, and then Vodafone in 1993, which set up the first cell phone network to compete against NZT.
“However, the big blow to Telecom New Zealand’s dominance came in 2006 when the national government announced Telecom NZ would have to unbundle its services. ... It was this direct assault on NZT’s de facto monopoly for telecom services (and the anxiety this generated among investors looking forward) that crippled the shares in 2006. ...
“Now, three years later, we’re returning to a humbled share price and a familiar constellation of problems: poor quarterly results, constant competition and new government regulations. The biggest difference is that this time New Zealand is just crawling out of recession. ... Consumers now want the newest wireless third generation (3G) technology. ... NZT was first to market with 3G and still maintains an advantage. However, New Zealand, though it loves this new technology, is a mature market. Just as broadband, after several years of enthusiastic adoption by new subscribers, leveled out, even the 3G system at some point will saturate this small island. Wall Street adamantly dislikes companies like NZT that don’t promise accelerating growth. Unless NZT can figure out how to market its services to the country’s 40 million sheep, its growth prospects are limited. That does not mean it should not continue to enjoy a dominant and lucrative position. If we can capture a double-digit dividend, we’re already ahead of the average total annual return for the S&P 500, which over the last 20 years works out to 10%. Price appreciation in NZT shares would just be the cherry on top. ...
“Over the last couple of years NZT has sunk $310 million into upgrading its wireless network to 3G, dubbing the new service XT Mobile, to allow data and video capabilities its competitors did not offer. Anticipation of 3G technology’s arrival had restrained new subscribers, but once XT arrived in late spring 2009, NZT enjoyed a demand wave—until January and February of this year when the system had four major failures, which deeply embarrassed the company, got its IT director fired, led to significant refunds to subscribers, knocked the share price down and, worst of all, gave customers a reason to look elsewhere for wireless contracts. ...
“So why would anyone want to own shares in Telecom New Zealand? Let’s start with the balance sheet that shows a modest debt to equity ratio. Despite the problems outlined above, NZT remains a cash generating machine, throwing off $214.7 million in free cash flow that the company can use to maintain the dividend. ... NZT is seeing its dominant position eroded but it still is tightly woven into the national economy not just because it is the country’s largest corporation but also because it remains, in the minds of New Zealanders, the national telecommunication company. Nonetheless, the company is deep into investors’ dog house, and the disparity between how NZT is valued versus other telecom companies not surprisingly exaggerates the company’s situation. Compared to other telecom companies, NZT trades at a 40% discount from the average telecom’s P/E, at an 11% and a 27% discount respectively from their price to book and price to sales even though it is much less leveraged. ... Current Price to Earnings, Price to Book, Price to Sales and Price to Cash Flow for the trailing 12 months are respectively 68%, 34%, 51% and 48% of their values over the last decade. And then there is that 10.7% yield. ... Buy up to $8.60.”
Gray Cardiff, Sound Advice
