Hating Telstra

The market’s scepticism about Telstra is one of the most sustained negative critiques of a big Australian corporate yet seen. It makes an interesting comparison to the euphoria about telcos in the first half of last decade. The scepticism may be partly attributable to the after effects of that era. The stock is on a dividend yield of 9.7% for this financial year and the next, and 8.9% for 2011-2012. Fully franked. That is very high, implying that the market is assuming a capital loss. It is a big negative bet. Southern Cross, interestingly, is starting to think again. It has a buy on the stock and a target price of $3.45:

We believe the market is pricing for material uncertainty (eg NBN, operating strategy, Future Fund overhang). Recent events, including today’s disclosure of 3Q11 net adds, give us greater confidence that these uncertainties are improving. We believe strong sales momentum can translate to earnings growth and as such we are 9% ahead of consensus EPS for FY13e. We have retained our BUY with a $3.45 TP.Whilst TLS is trading on 11.6x FY11e earnings, we see FY13e (9.6x PER) as more reflective of an operational and earnings turnaround. Our $3.45 TP equates to 11.3x FY13 EPS, and we are 6%/9% ahead of FY12e/13e EPS consensus. TLS is supported by a compelling 9.6% dividend yield.

Most other brokers are steering a middle ground, a not unusual strategy. Macquarie has an outperform rating (code for: “it might go up, we don’t really know, but on the other hand we don’t want to be caught out if it does”) and a target price of $3. It projects a total shareholder return of 13%:

Subscriber growth trends remain strong: Telstra presented March-quarter subscriber growth for a number of services indicating very strong growth trends have continued. Post-paid mobile sub growth has accelerated, no doubt boosted by Vodafone’s network issues around Christmas time. In addition, retail fixed broadband momentum held up, and we estimate Telstra is on track to capture ~70% of net sub adds.

Deutsche Bank plants itself firmly on the fence with a hold recommendation and the same target price of $3:

Despite strong subscriber growth, Telstra reaffirmed its guidance of flattish revenue growth and a high single digit EBITDA decline in FY11 due to costs incurred as part of its new strategy. This is consistent with our expectation of 0.3% sales revenue growth and 9.1% decline in FY11, implying 2H11 EBITDA decline of 8.6%.

What is that they say about buying a stock when (almost) everyone  hates it?


Southern Cross


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  1. Ever since Telstra was floated, all its ‘goodness’ was hacked, slashed and eaten leaving behind a slow rotting husk for shareholders. Aggressive competition hasn’t helped either. The NBN initiative has instilled some confidence. But are the benefits of NBN cost effective?

    From my understanding, fibre optics has a 25-40 year in-the-ground and a 15 year aerial lifespan. Copper cable has over 100 years+. Once the rollout is complete, it’ll need to be done again. With the advancement of wireless technology and the fact that transmission towers are feed by fibre optic feeds anyway – we’re able to achieve comparable speeds at a tenth of the cost with the added feature of portability.

    So why is the government pushing ahead with NBN?

    • Agree with you again! To date, MB has been an NBN-free zone. Curious in light of the cost and relevance of the NBN for Australia.

    • there isn’t enough bandwidth within the wireless spectrum for us all to use wireless broadband – it is not a valid option.

      • The next generation wireless 802.16m WiMAX, otherwise known as “WiMAX 2”, purports to deliver peak speeds of 300Mbps with lower latency than previous generations and can be located within existing 3G towers. This is higher than the 100Mbps fibre optics option.

        This needs to be explored further before we jump head-first into fibre optics to home.

        Furthermore, we need to keep in mind that our speeds are throttled by cables connecting us internationally as most of our traffic is OS.

    • “So why is the government pushing ahead with NBN?”

      Don’t know or have anything concrete, maybe such things can only be explained by conspiracy, that is, does anyone know of any huge conglomerate industrialists lobby that has a super abundant oversupply of optic fibre cable?

      Well someone took some decision makers here out to luch.

      But I must take the side of incompetence and stupidity over conspiracy. The Government must really believe (themselves) they’re actually doing what is best for us. Well… what’s the conspiracy side again, funny how all our backs are still itchy over this. The Prime Minister and cohorts look quite comfortable with this NBN.

  2. I remember reading a chain email from someone claiming to work at a major telco. This email stated similar life spans for fibre and copper as The Nod has above. This email read like political propaganda.

    So far the information that I have found on the internet does not support such a short physical life spans for fibre. I’ve read that the fibre is basically limited by the lifespan of the coating – same as copper.

    Also, note that replacing the cable will not be anywhere near the cost of the initial install. They already have the design, easement, conduits, pits, and connections. They just need to pull a cable – easy.

    • Not aware about any ‘chain mail’ but a quick google search can confirm the above.

      In relation to the infrustruture that would be in place – totally agree.

      • What I should’ve also added is the concern on costing. Some external independant analysts have estimated the real cost to somewhere between 80-100 billion.

        If this government’s track record is of any guide – this concern is very real.

        • LandDeveloper

          The govt has a few tricks up its sleeve to keep costs down – by passing infrastructure costs on to home buyers. Telstra used to pay for the pit and pipe infrastructure and happily drop their cables into a common trench when the developer was putting in other services. Now the govt is asking developers to pay for the pit and pipe in new greenfield estates and asking for trenches to be kept open until one of their inspectors gets round to visiting – meaning trenches have to be made safe (additional cost) or backfilled and then reopened again (additional cost) when the inspector shows up. So once again these costs will ultimately get passed on to the new home buyer for the priviledge of having NBN. Furthermore, small and mid-size projects aren’t included in the NBN fibre supply so if you’re buying into a new land project with less than 100 lots, your developer will struggle to amortise these new costs over such a small project and you may go without.

  3. It’s (the NBN) is one of those (political) ideas that falls into the category of seeming like a good idea at the time.