Australia | Jan 18 2007
By Chris Shaw
The recent rally in the Telstra (TLS) share price has been impressive, coming on the back of brokers upgrading forecasts based on the prospects of the company’s transformation program moving faster than had been anticipated.
In the last few days a number of brokers, ABN Amro, Deutsche Bank and Credit Suisse have all outlined positive scenarios for the company, which in the case of the latter two brokers also led to higher earnings estimates and price targets.
Deutsche, which rates the stock as Buy, has lifted its target to $5.20 from $4.20 as it now feels comfortable in factoring into its forecasts the benefits from the transformation program underway.
Its comfort is supported by the fact the company has already delivered 42% of the planned headcount reduction, improvements in its business processes and the launch of NextG and IT systems.
At the same time the broker expects Sensis to generate 9% revenue growth in coming years, while it sees BigPond lifting its retail broadband market share by another 5% by 2010 to almost 50% of the market.
This has led to increased earnings estimates, the broker lifting its profit forecast in FY07 to $3,292m from $3,234m and in FY08 to $3,573m from $3,369m, with 8% EPS growth forecast in coming years.
Credit Suisse is equally as positive and equally as confident of success in the transformation program, expecting meaningful operating and capital expenditure savings to become evident in the next 12 months.
As an example it sees the company’s workforce reduction target to be achieved this year, an outcome it suggests would support upgrades to consensus earnings forecasts of around 10% in FY08.
It also expects capital expenditure to fall from a forecast $5.4 billion this year to $4.2 billion in FY08 and $3.8 billion in FY09, which is a positive in that it not only supports the current dividend forecast of 28c but offers the company increased flexibility in terms of capital management options.
The broker values the stock at $5.05, which is equal to its new target price, an increase from the previous $4.78.
While company specific factors should boost earnings, ABN Amro sees Telstra as also likely to benefit from a general improvement in telco valuations as industry conditions improve. It notes this was the case for European telcos last year and while Telstra has lagged it expects a catch-up over the course of 2007, particularly if capital expenditure spending is lower than currently expected.
The devil’s advocate in all this is Smith Barney Citigroup, which today downgraded its rating to Sell from Hold. The broker’s argument is the transformation program is a five-year plan and while to date results have been encouraging there remain a number of risks, while at the same time the market is pricing in too great a chance of everything going perfectly to plan.
Citigroup also notes talk of upside from moves such as exchange consolidation is premature, as such a program would also take some time to put into place and is unlikely to produce as much in savings as are being projected.
It estimates at current levels the stock is trading on 15.6 times earnings in FY07 and 18 times in FY08, which suggests a stretched valuation and makes the stock expensive against global telcos.
Citigroup also points to the recent outperformance as a case of too much too soon, as on the broker’s numbers the stock has outperformed the S&P/ASX200 index by around 12% since November.
The FNArena database shows a fairly evenly divided range of opinions on the stock, with three Buy, three Neutral and three Underperform ratings along with an Accumulate recommendation. The average share price target is $4.26, while Thomson One Analytics shows a median price target of $3.93.
Shares in Telstra are little changed today, as at 3.25pm the stock was trading 1c higher at $4.40.