Telstra shareholders have approved the NBN deal, so brokers are unsurprisingly rushing to opine. Telstra offers a high, fully franked yield, so the share price only has to stay stable for it to be a decent play, at least compared with the rest of what is a very uncertain market. According to Citi, which has a buy and a taregy price of $3.25, the expected dividend yield is 8.9%. Citi lists the obvious risks with the stock:
The key risks which could impede the share price reaching our target price are as follows:
- NBN deal is altered.
- Telstra shareholders reject the deal.
- Risk of greater revenue and EBITDA losses due to increased retail competition.
- Share overhang from Future Fund (now below 5%).
Telstra’s inability to mitigate structural challenges in fixed line and advertising and directories businesses.
The interesting thing is the more sceptical sentiment about Telstra elsewhere. It is, after all, the big end of a duopoly churning out cash. In an environment where the non-resources part of the economy is looking very shaky indeed, it is a bit curious that bearish sentiment is more evdient here than in sectors like retailing that seem far more questionable. The strategic options for a dominant player are always substantial, even when it is being forced to change its business model.
Macquarie is sitting on the fence with an outperform rating and a $3.30 price target. But it does note that the company has some good capital options:
Opens the door to capital management potential – but not just yet: One outcome of the NBN deal is that it will generate significant levels of surplus free cash flow for Telstra, and the Board has said it will review capital management alternatives over the coming year. This review will take into account key considerations including the level of surplus free cash generation, the outlook for broadband policy in the context of a potential change in Government, future investment opportunities and long-term target gearing levels. We discuss these in more detail in this note.
Morningstar has an accumulate reccomendation, just above hold. But it has a fair value of $3.60, which seems more like a buy play. The broker notes the critical management challenge, the transition to a market centric company that has a focus on the customer. After a short pause for ironic laughter, this is not as out of reach to Telstra as it might first seem. Especially given its highly cashed up position. It is mainly a brand discussion and the brand is without doubt strong, if a little tarnished.
Deutsche only has a hold and a more bearsih price target of $3.05. Deutsche is clearly unconvinced by the strategy:
The company provided only a limited update on the progress of the new strategy, highlighting that customer satisfaction increased by 3% in FY11 and is up by the same amount in FY12 YTD. Customer complaints fell by 30%. Unlike last year the company did not provide an update on subscriber growth in the September 2011 quarter, except to highlight that mobile and broadband subscriber base grew. We expect that the rate of subscriber growth would have moderated in the quarter.
Telstra indicated that simplification and productivity benefits enabled cost savings of over $600m, which was re-invested in the business to grow the customerbase
- Telstra also emphasized its focus on new growth areas, outlining the followingrecent initiatives:
- Investment of $800m in cloud computing, and $600m in digital businesssolution,
- Launched Foxtel on the T-Box
- Media, network application and services, Asia – accounting for 19% of revenue.”
So far, so predictable from the brokers. There’s obvious reasons for caution, but it is worth asking the question: “Is Telstra what this market lacks so much — a boring and predictable story with a reassuring yield?” It might well be.