Is Telstra All About Shareholder Value?

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

By Chris Shaw

Australia’s telecommunication mastodon Telstra ((TLS)) has responded to proposed reforms of the telecom industry by lodging a submission to the ongoing Senate inquiry. It is no surprise the company has stated its opposition to significant parts of the proposed legislation that could see separation forced upon the company.

According to analysts at Macquarie, the fact submissions have now been tabled and the inquiry is underway means the big issue is will the legislation get passed and if so what form will it take? The broker assumes the legislation, effectively forcing Telstra to split into separate operational entities, will be passed largely in its current form by late November. This will require seven senators from the minor parties voting in favour.

As such Macquarie suggests the Telstra response is an attempt by the company to influence the views of these senators, as they can cause material amendments to the legislation in return for voting in favour. In the view of RBS Australia, the submission by the company draws a clear line in defence of shareholder value while still working towards a cooperative outcome wth respect to the National Broadband Network or NBN, which it sees as the right balance for the company to take.

One point the company has made is it will not be forced into separation regardless of the legislation that is introduced, the broker noting if the Government’s preference is for the NBN it can park the Bill and continue negotiations rather than making a decision that could destroy value in the company. Any discussions would include subjects such as spectrum and any possible divestments such as cable payTV company Foxtel.

The broker suggests the fall in the share price on Friday was caused by shareholders showing nerves about the possibility of further confrontation with the Government, but it takes the view it is better for the company to stand up and protect long-term value even at the expense of some short-term share price weakness.

Macquarie analyst are of the view that any delays or amendments to the legislation are likely to be viewed as favourable outcomes for Telstra, at least on a relative basis. In the broker’s view, the risks are priced into the stock at current levels, so Macquarie sees no reason to shift from its Outperform rating on the stock.

RBS Australia agrees, noting the stock at present remains well below its valuation based price target of $4.40. RBS suggests a worst-case NBN outcome could see material value destruction, but the broker also sees value at current levels that would be recognised by any NBN deal that worked for both the company and the Government.

Citi is not as positive and rates the stock as a Hold, taking the view the Telstra submission contained both valid and less valid points.The valid ones include the need for greater checks and balances rather than Ministerial and Regulator power being as strong as what is currently implied in the proposed legislation.

On the other side the broker estimates the downside risk of not doing a deal over the NBN will be greater than in a co-op model, which leads it to suggest the stock is likely to be range bound until there is some agreement reached. Citi’s target is $3.40, which is within its $3.00-$3.50 range as negotiations continue.

Overall  the FNArena database shows a total of eight Buys and two Holds, with an average price target of $3.89. Shares in Telstra today are slightly higher and as at 3.15pm the stock was up 4c at $3.20. Over the past year it has traded in a range of $2.93 to $4.46.

Telstra’s implied dividend yield is now close to 10% (on FY11 consensus projections).

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