Initial Signs of a Turnaround for Telecom New Zealand

We have undertaken a review of our Telecom New Zealand forecasts following the release of its fiscal 2013 result. Our fiscal 2014 revenue forecast is revised 2% lower to NZD 4.1 billion, representing a 2.5% decline on fiscal 2013 as Telecom exits low-margin business. We now expect overall revenue to stablise in fiscal 2015. Despite the modest changes to our fiscal 2014 forecasts, our fair value increases 8% to NZD 2.70 as we gain confidence in Telecom's strategy in delivering longer-term growth. Initial signs are the stabilisation of market share in fixed-broadband and mobile subscriber net additions in the second half of fiscal 2013. In our view, the turnaround is not yet factored into the current valuation and we believe the stock is undervalued. We retain our narrow economic moat rating which is underpinned by Telecom's mobile network, which enjoys efficient scale. Telecom and Vodafone's dominant position in a mature New Zealand market, act as a barrier to entry for new entrants.