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Telecom NZ on hold for how long?

Telecom New Zealand (ASX: TEL) is starting to put itself forward as a turnaround story that might be worth hanging on for.

Despite a share price decline in the past couple of weeks, analysts are forecasting improved earnings growth, from marginally negative in the current financial year to positive by the end of 2013-14. That is mostly as a result of the Telecom NZ board setting the course for lower costs and better positioning itself for growing markets, as revealed in three-year strategic plan unveiled at an investor day in Auckland last week.

Investors didn’t instantly reward the new direction on the ASX, mostly because it was preceded by a May 16 stock anouncement saying not only that EBITDA guidance for FY13 remained in the $1,040 million to $1,060 million range, but that management expected the result to be nearer the bottom end, which it blamed being due to increased price competition in the fixed line market.

However, Telecom NZ’s fortunes hinge on just how much it can reposition itself from a traditional fixed and mobile infrastructure company to one that’s more streamlined and commercially focused — in fact “a future-oriented, competitive provider of communication, entertainment and IT services delivered over its networks and the Cloud,” as it said in the same stock exchange announcement.

Heaving off network services operator Chorus is a start, but so far business performance hopes are driven more by the late March announcement of a reduction in employees from about 7,500 to about 6,500 by mid year, resulting in a $100 million plus reduction in annualised payroll costs. The company is also targetting an ongoing $100-200 million annual boost from business-wide simplification and further cost reductions.

Telecom is dominant in the fixed line and broadband markets, with current market share of about 60% and almost 50% respectively, compared to rival Vodafone having about 30% in each. So it’s in the mobile market, where with a little over 30% it lags Vodafone’s more than 50% share, that the company seems to have the most scope for growth.

Telecom New Zealand has understandably not had the share price run-ups of its lesser peers TPG Telecom (ASX: TPM) or M2 Telecommunications Group (ASX: MTU), which have lower market capitalisations, but for those looking for exposure to the telco sector without bending to buying an expensive Telstra (ASX: TLS), it could offer more upside in the medium term.

Foolish takeaway

The sleeper for Telecom New Zealand might be data connectivity, helped both by the rollout of its 4G network expected to start in Auckland in October, but also, and perhaps ultimately more importantly, the opportunities presented by the government-initiated optical transport network (OTN), an ultra-fast broadband rollout supposed to reach three-quarters of the population by 2020.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Andrew Ballard does not currently own shares in any company mentioned.

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