Yovich & Co. Weekly Update - 3 February 2014
Feb 3, 2014 | Commentary
February 3rd 2014
This Week’s Themes
- The local market edged its way sideways last week, proving how strong the outlook is for the New Zealand economy after a shaky week globally.
- Concerns about the stability and growth prospects of the emerging markets caused a sell off in most offshore markets.
- The U.S. markets reacted as expected to the announcement that the Fed Reserve will slow Quantitative Easing for the second month in a row with markets down. The Fed Reserve has reduced its bond buying programme by another $10 Billion to $65 billion a month after the announcement that “growth in economic activity picked up” since the December meeting.
- The U.S. dollar strengthened against the Kiwi with the combination of tapering Quantitative Easing and the New Zealand Reserve Bank deciding to keep the OCR on hold at 2.5% providing motivation for traders to switch to USD.
- The announcement from the New Zealand Reserve Bank last week on the OCR makes it look likely that the first rise in interest rates will be in March after three years of no movement.
Telecom Corporation of New Zealand Limited (TEL.nz) – Result Preview.
Telecom is due to announce its first half result this month and will be the first opportunity to asses the success of the restructure that occurred in 2013. Last year, Chorus was spun off, AAPT (the Australian business) was sold and staff numbers were reduced by 1,000 (15%). The near term expectations are that earnings will be flat with gains made primarily from cost reductions and growth in mobile services. These gains, combined with falling capital expenditure in 2014, will support the current dividend which is currently grossing 8.5%.
We like the long term prospects for Telecom as the Telco sector is a growth industry, and Telecom, once they have got costs under control and coupled with an under leveraged balance sheet (Debt /Equity of 20%), are in a prime position to benefit from this growth. First NZ Capital has an outperform recommendation and $2.50 price target. Current price is $2.34.
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