Weaker Revenues For Telstra But Brokers Remain Positive

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

By Chris Shaw

Last week ended on a mixed note for telecommunications giant Telstra
((TLS)), the company advising the market of weaker than expected
revenues at the same time as noting it had reached some agreements with
NBN Co. with respect to a role in the National Broadband Network
project.

As Cit notes the revised guidance is primarily a revenue issue, with
the combination of a stronger Australian dollar impacting on overseas
earnings and an increasing trend towards homes in Australia shunning
fixed line connections for just a mobile phone, as well as increased
competition in the mobile sector, meaning revenue for FY10 is likely to
be flat rather than the low single digit growth previously indicated.

At the same time Deutsche Bank notes Telstra is beginning to position
itself for a migration of customers to the NBN, a trend it expects will
see margins weaken from an expected 43% in FY10 to around 40% by FY15.
Deutsche Bank points out such a customer migration is its least
preferred structural separation outcome as it makes it difficult for
the inherent value in the existing copper network to be crystallised.

To reflect the update, Deutsche Bank has cut its profit forecasts from
FY10 on by around 4%, while the market view of the earnings
impact is relatively limited given Bank of America Merrill
Lynch has cut its earnings per share (EPS) forecasts by 1.5% in both
FY10 and FY11 and Citi has trimmed its estimates by a similar amount to
Deutsche Bank.

Consensus earnings per share forecasts for Telstra according to the
FNArena database now stand at 32.6c for FY10 and 34.8c for FY11, though
of importance according to Deutsche Bank is dividend expectations of
30c and 31c respectively are unchanged, while consensus dividend
forecasts are 29.7c and 31.7c for FY10 and FY11. The stock continues to
offer value given a yield of around 9%, which Deutsche sees as
attractive.

The news wasn’t all bad, Citi pointing out the update on the NBN
discussions were positive with respect to the structure of any
agreement as there was some progress with respect to factors such as
traffic migration and duct access and these form part of its preferred
model.

But as Bank of America Merrill Lynch pointed out, there was also a lack
of detail with respect to the progress of the NBN discussions,
something it suggests will see the stock range bound until further
details are made available. Even with few details Credit Suisse
continues to see valuation upside for Telstra from any NBN deal as it
suggests indications are the NBN wants access to the company’s
infrastructure, which is likely to mean annual payments to Telstra that
could replace cash flows lost as the copper network is gradually
switched off.

Without Telstra’s infrastructure Credit Suisse estimates the Government
would have to subsidise the network to the tune of $7-$17 billion,
meaning an agreement between it and Telstra makes compelling financial
success and therefore remains likely. Deutsche Bank agrees, continuing
to suggest the stock could enjoy a re-rating as any NBN deal is
finalised.

Overall the FNArena database shows Telstra is rated as Buy seven times
and Hold three times, which is unchanged from before the latest update
from the company. The average share price target is $3.85, up from
$3.83 previously. Shares in Telstra today are weaker and as at 11.40am
the stock was down 9c at $3.34. Over the past year the stock has traded
between $2.93 and $3.87.

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