NTT a Hold on Japanese Concerns

Nippon Telegraph & Telephone Corp. (NTT - Analyst Report), the largest telecom service provider in Japan, announced respectable first quarter fiscal 2009 financial results (ended June 30), well above our estimates. Net earnings improved significantly as a result of reduction of handset subsidies along with an embellished customer pricing strategy at NTT DoCoMo.

Other subsidiaries also generated increasing revenue from IP/Packet communications services. NTT, however, continues to face intense pricing pressure as smaller service providers offer attractive voice, broadband data and mobile services. This, together with ongoing economic weakness in the Japanese market, may limit improved valuation levels over the near-term. We maintain our Hold recommendation on the shares.

NTT is currently trading at 14.4x our fiscal 2009 earnings estimates. This is at a significant discount to both the peer group (other Asian carriers) and the S&P 500 averages. With respect to all other selected valuation metrics, the stock is also trading well below its peers. According to our analysis, NTT maintains technical superiority with large scale global deployments of W-CDMA technology, facilitating the company to offer compatible international advanced roaming capabilities to its subscribers.

We are concerned about lower Average Revenue Per User (ARPU) and its subscriber retention plan for its emerging Video on Demand services. We maintain the same target price of $26 based on a forward P/E multiple of 15.2x our fiscal 2009 earnings estimates, at par with the S&P 500 average.

Nalak Das contributed to the report.

Read the full analyst report on NTT