Telstra’s Dialling The Right Numbers

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

By Chris Shaw

So many companies are now cutting their earnings guidance at their annual general meetings to prepare investors for the disappointment sure to come with the quarterly results. That’s why Telstra’s ((TLS)) announcement yesterday at its annual strategy day that it remains on track to meet previous earnings guidance for FY09 and earnings and free cash flow targets for FY10 was viewed by most in the market as a big positive.

While risks remain from the condition of the broader economy and uncertainty abounds about any FTTN (fibre to the node) project the telco may have to undertake, Macquarie notes the group’s transformation remains on track and this will drive future cost savings. It expects there will be additional benefits flowing through beyond FY10, as many projects currently being worked on will be completed in the next couple of years. The result of this will be further reductions in the company’s cost base.

As well, the broker notes the competitive environment remains relatively favourable, as revenue trends are still solid and competitors are either lifting prices or removing products from the market, all of which works in Telstra’s favour given its dominant market position.

In Citi’s view, the update means investors can’t argue with the company’s operational strategy, as it remains aligned to the broker’s checklist it presented to the new management team when it was appointed in 2005 and is now starting to deliver as expected. Although, the broker notes the major upswing in earnings terms won’t be achieved until the second half of 2009.

Where there remains an issue, in the broker’s view, is in respect to the FTTN network, as attached to this project is the chance for the company to be forced into a structural separation. However, the broker notes the government has not proposed such a move. As a result, the broker expects the company to bid for the right to build the network.

But JP Morgan sees risks surrounding the national broadband network project, arguing the separation risk for the company if it gets the nod to build and run the project should be priced into the stock. Countering this is the view of Merrill Lynch, who thinks that alternatives to the project being handled by Telstra are dwindling, which it regards as a positive for the company.

Another question posed by JP Morgan is whether the transformation program, with respect to operating leverage indicated by the company in coming years, will really deliver benefits to shareholders. While there is no doubt the company is now in a better position, it has cost almost $6 billion to get to this point.

The broker also suggests FY09 earnings guidance will be tested by the weaker economic environment in Australia at present, especially with respect to revenue softness from lower corporate and government spending and scope for weaker directory advertising and discretionary spending on items such as handsets and pay-TV.

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