Share Price Alert: Telecom New Zealand Ltd 3

Telecom NZ Ltd [TEL.NZX] shares have had an amazing run over the last month or so where the share price has taken off from $1.95 in mid April to finish trading at $2.33 yesterday, a rise of almost 20%.

With a share-price last reached in February - a 52 week high for the stock - the stock looks like getting overcooked to me and investors wishing to take a punt on anything that may come out of the fibre network rollout may want to temper their excitement because any additional revenue coming from it is many years away.

For the majority of the last year shares have been trading below 2 bucks and this is on 4 pieces of news out a month ago ( 1, 2, 3, 4 ) mostly related to taxpayer funded broadband.

The market is excited by the prospects for Telecom that subsidised broadband might bring but the payback for investment by the taxpayer and by the company itself is uncertain especially given the low speeds the company indicate their new fibre might bring and the restrictions and frustrations that will bring for customers as they realise they will not be able to do even a fraction of the things their mates overseas have been able to do for a decade or more already and that future speeds for global internet speeds (sans NZ) will be hundreds of times faster than ours.

I have a gut feeling the increased buying has come about from speculation that the company will win the majority of the tenders to rollout taxpayer funded broadband and if this happens Telecom as a company will have to be split into 2 separate companies, each presumably with its own NZX listing. Investors clearly see more value in the company as two seperate entities and see windfall profits if the company splits.

There is of course no guarantee that Telecom will win the majority of the government contracts, but more likely than not it will, and history typically shows that investors do benefit from company splits of this kind.

Market watchers though are ignoring the bungles the company has mismanaged with the introduction of new services and technology in the past so I remain skeptical of share price increases based on the possibility that the fibre roll-out will bear some positive fruit.

Until then performance for the company is likely to be more along the lines of weakening revenue, smaller profits and cost cutting.

Buy closer to 2 bucks on the inevitable pullback.


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