Who thinks Telecom shares are too high? Telecom

What was behind Telecom's 8.53% share drop yesterday?

The company posted headline numbers that were only factionally short of analyst expectations as underlying earnings rose 9% to $422 million. Full-year earnings before interest, tax, depreciation and amortisation from continuing operations climbed 42% to $1.08 billion, even as sales declined 8.6%t to $4.58 billion. Analysts were expecting ebitda of $1.1 billion on sales of $4.67 billion.

But guidance was tepid. Earnings for 2013 were seen as flat to a single digit decline. And its mobile customer numbers were "reset" at 1.57 million (from the previous half year's 1.97 million) with the CDMA network closure.

And Telecom had mixed results in the two areas that are supposed to compensate for its declining traditional landline business: mobile and broadband (Telecom Retail chief executive Alan Gourdie, responsible for both segments and an unsuccessful CEO candidate, earlier announced his resignation).

So what sent Telecom shares (NZX: TEL) into such a spin?

After opening trading at $2.75, by 5pm it had dropped 23.5 cents to $2.52, on trade of more than 32 million shares worth $83.6 million. That wiped $430 million off the company's market capitalisation.

Sending a message it thinks its shares are too high
For Forsyth Barr analyst Guy Hallwright, a key element in yesterday's share fall was, “The comment the share buy-back might not be completed by the end of the year but basically when the board thinks it's appropriate was sending a signal that maybe Telecom themselves thought the share price was getting a bit high.”

The company has so far completed $169 million of its $300 million share buy-back programme, CFO Nick Olson said yesterday.

Speaking to NBR soon after the result Mr Moutter said Telecom shares were difficult to value after the Chorus spin-off. The new boss added that there was now some distance between analysts valuations and Telecom's market cap - what could be seen as a tacit admission the stock price had run a bit ahead of events. (Ahead of yesterday's report, Forsyth Bar had a DCF valuation on Telecom of $2.06 a share; Deutsche Bank a 12-month target of $2.33.)

Mr Hallwright also flagged higher than expected capital expenditure, which might have spooked investors. Mr Moutter's line-in-the-sand comment about broadband market share implied more spending in that areas.

And while 9% was a big one-day drop for Telecom Mr Hallwright says the price had a good run-up this month leading up to the result - rising 15%.

Before today's full-year earnings report, Telecom had risen 34% (see chart above) since the Chorus spin-off in November.

The board declared an 11 cents-per-share final dividend taking the annual payout to 20 cents per share.

Results by division
Telecom's wholesale and international unit, which provides services to other telecommunications providers, reported a 28% fall in sales to $745 million, though ebitda rose 6.2% to $154 million as it sliced a third from its expenses bill.

The retail business increased earnings 2.6% to $506 million with a 4.3% decline in sales to $1.93 billion.

At the end of the balance date it lifted the number of customers on its XT mobile network 32% to 1.57 million, leaving 466,000 on its obsolete CDMA network.

The phone company increased average revenue per unit 9.4% to $29.14 for mobile customers in fatter data sales.

Telecom's Gen-I, which offers services to businesses, reported a 4.4% fall in sales to $1.36 billion, while lifting earnings 11% to $263 million as it squeezed its labour costs.

Australian unit
Australian unit AAPT, which divested its consumer division in 2010, reported a 5.6% decline in earnings to $A67 million on a 25% drop in sales to $A516 million.

The technology and shared services unit, which maintains Telecom's shared systems, reported zero earnings as sales and costs fell by about a fifth, while the corporate segment increased ebitda 19% to $37 million, with a 25% lift in sales to $223 million as it took on greater group responsibilities.

Telecom says the Chorus demerger will lead to cheaper compliance costs, though it faces a risk of more expensive access to the network company's infrastructure if the Commerce Commission de-links the prices of certain services delivered on the copper lines.

The split meant Telecom slashed its capital expenditure by 42% to $386 million in the 2012 year, and it signalled it expects to spend $460 million in 2013, which includes the spend on spectrum and an allowance for a data centre.

OnePath senior investment analyst Craig Brown says Telecom faces a competitive environment that may get tougher if rival mobile phone operator Vodafone New Zealand wins regulatory approval to buy fixed-line carrier TelstraClear.

Chorus will report its debut earnings result as a standalone entity on Monday.