Analysts Divide on Outlook For Australian Telecom Telstra
By Lyndal McFarland
The Wall Street Journal
Thursday, November 29, 2006
SYDNEY, Australia -- After 17 months of cajoling investors
and Australian lawmakers to take a bet on his turnaround
Telstra Corp. Chief Executive Sol Trujillo has put some
of his own money on the table.
A few analysts aren't sure his gamble will pay off in the
Despite a successful sale of 15.5 billion Australian dollars
(US$12.1 billion) of shares by the government this month,
Telstra faces stiff head winds in the form of tough
competition and falling fixed-line revenue.
Previously, the government owned 52% of Telstra. The share
sale cut that to 17%, which has been transferred to the
Future Fund, an arms-length fund manager owned by the
The government nearly doubled the A$8 billion that Canberra
expected to raise from wholesale and local retail investors,
as its investment-bank advisers devised a clever marketing
campaign, which included a 14% dividend yield on the
"installment receipts" at the heart of the sales process
known as T3.
Among the buyers was Mr. Trujillo, the former U.S. West CEO,
who has caused headaches in Australia's Parliament with his
antiregulatory campaign. He spent more than A$500,000 on his
first direct holding in the telecom company since joining in
So far, Mr. Trujillo has done well with the receipts offered
to "mom and pop" buyers at A$2 each. They were at A$2.26
With investors focusing on the receipts' generous dividend,
Telstra's ordinary shares have been out of favor. The stock,
whose 12-month high was A$4.13, fell two Australian cents
yesterday to close at A$3.67. Telstra shares have dropped
6.6% this year.
While the receipts have shown some strength, the risks of
investing in Telstra and other telecom stocks since the 2000
global tech-stock tumble are obvious. When Canberra offered
its second tranche of Telstra stock in 1999, shares were
sold at A$7.40. The stock was just above A$5 when Mr.
Trujillo came aboard.
"We believe that once the technical issues associated with
the T3 sale subside, Telstra will trade back down towards
our valuation," said Merrill Lynch & Co. analyst Patrick
Russel in a note to clients, pointing to his A$3.31-a-share
Mr. Russel, who has a sell rating on Telstra, cites
competition from rivals such as
Singapore Telecommunications Ltd. and
Vodafone Group PLC, along with regulatory risks.
With Canberra's sale complete and Telstra free of government
shackles, some analysts expect Telstra to resume its
antiregulatory campaign with a focus on the threat to its
bottom line. Telstra has warned that its operating profit in
the six months ending Dec. 31 will fall as much as 20%
because of costs associated with the transformation plan.
The results are due out in February.
Although Mr. Trujillo delivered his third-generation mobile
network in record time, investors fear delays in other
facets of his turnaround strategy may blow out Telstra's
timeline for thousands of layoffs and consequent cost
Richard Wallace, managing director at Wallace Funds
Management, says he believes there is still "significant
execution risk" surrounding Mr. Trujillo's strategy, which
would see Telstra spend billions of dollars over coming
years upgrading systems and reducing staff levels.
Mr. Trujillo, who outlined his plans a year ago, has already
had to trim his annual earnings-growth forecasts, to between
2% and 2.5% through June 2010, from between 3% and 5%. Last
month, Telstra acknowledged costs will rise more than
initially anticipated, while margins will be lower.
Of seven major brokers surveyed, two -- Credit Suisse Group
and Deutsche Bank AG -- recommend buying Telstra. Three have
neutral ratings, and two -- Merrill Lynch and Goldman Sachs
JBWere -- have the equivalent of a sell rating on the stock.
In the past two weeks, Macquarie Research and Citigroup Inc.
upgraded their ratings, both to neutral. Citigroup's Tim
Smeallie sees limited downside -- in a "worst case"
scenario, A$3.14 a share. But he urged investors to be
cautious, warning that industry head winds remain strong.
Lyndal McFarland at