Csfb Lightens Up On Telstra In Anticipation Of Sol's Strategy

The Age

Wednesday October 5, 2005

By COLIN KRUGER, SYDNEY

TELSTRA'S struggling share price has received a boost after a major broking house upgraded its profit outlook based on the "significant cost savings" that could flow from a multibillion-dollar transformation of its network.

Credit Suisse First Boston estimated Telstra could comfortably reduce its labour costs alone by $1 billion - slashing 8000 jobs in the process - by following the lead of its overseas peers and investing in a next generation network (NGN).

"The implementation of a NGN would potentially result in ongoing savings of $1.2 billion by the 2010 financial year," said CSFB's Justin Cameron.

The broker said Telstra's labour costs compared poorly with regional neighbours like Telecom Corp of New Zealand.

"In our view, the overriding impetus for Telstra will be in the cost savings an NGN could deliver over the medium term. We believe these will be critical to offsetting the pressure on the revenue side of the business. Also important will be the expanded services that an NGN would enable," he said.

The report could foreshadow the mid-November announcement by Telstra chief executive Sol Trujillo, which is expected to detail his strategy for cutting costs and positioning the telecom for new growth services.

Several brokers have predicted that the announcement will include an NGN - sometimes referred to as an internet protocol (IP) network - which can run voice, data and multimedia services. This would simplify Telstra's physical network and supporting infrastructure, and reduce its reliance on its 20,000 technical staff. Telstra employs 3000 people just to manage the 160 different billing systems it uses, says CSFB.

The report is the first real assessment of the potential upside of Mr Trujillo's strategy announcement, with recent broker reports trading downgrades on the stock after Telstra lowered its earnings forecasts last month.

CSFB raised its earnings estimate for Telstra by 7.5 per cent for the 2007 financial year, and 15.2 per cent for 2008. It also upgraded its recommendation from "neutral" to "buy" and lifted its price target 48 ? to $4.78.

Telstra shares rose 9 ? to $4.20 yesterday.