We downgrade our recommendation for Nippon Telegraph & Telephone Corp. (NTT) to “Underperform” ahead of its fourth quarter of fiscal 2010 financial results. We remain concerned regarding the less-than-anticipated sales of mobile handsets due to weak economic conditions in Japan together with significant declines in average revenue per user (ARPU) as subscribers migrate to discounted service plans.
The company is facing intense pricing pressure from smaller telecom service providers. KDDI and Softbank are gradually improving their mobile networks with 3G/4G technologies. Near-saturation of the Japanese wireless market also remains a major problem. Severe competition together with Nippon’s leveraged balance sheet may restrict higher valuation levels over the near term.
Another concern is the leveraged balance sheet. At the end of the third quarter of fiscal 2010, Nippon had approximately $50.43 billion of debt outstanding and just $11.71 billion of cash & marketable securities. Free cash flow (cash flow from operations less capital expenditures) fell precipitously. The severe economic recession in the Japanese market may add further impediments to overall financial conditions over the near term.
Read the full analyst report on “NTT”
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