Telecom Readies for 4G Launch, Participating in Spectrum Auction to Boost Network Capacity

Narrow moat Telecom New Zealand, or Telecom, has formalised details for the deployment of its 4G network and participation in the 700 Megahertz, or MHz, spectrum auction. Both events were expected to occur in the second half of this calendar year and there is no change to our view on Telecom. We expect the launch of its 4G network to help sustain subscriber growth momentum in the second half of fiscal 2013. We also forecast average revenue spend to rise from greater smartphone penetration and increased demand for mobile data from consumers. As for the spectrum auction, we expect all three players in the mobile market to participate. Telecom's scale and existing cost advantage, a key moat source, will allow it to acquire a greater amount of spectrum in the auction relative to its competitors, in our opinion. Reinvestment in spectrum will reaffirm Telecom's competitive edge in network quality. Our fair value estimate of NZD 2.70 is unchanged and, with the shares trading below our fair value estimate, we continue to see value in Telecom as the company progresses on its turnaround strategy. Our forecasts are also unchanged and we anticipate revenue to stabilise in fiscal 2015.