Investors Take Shine To Telstra

Sydney Morning Herald

Tuesday February 8, 2005

Colin Kruger

Telstra's share price has risen from its extended sojourn in the doldrums to push through the $5 mark over the last week as brokers factor in some potential upside to the telecom's first half results this Thursday.

A bonanza Christmas period for mobile phones and continued broadband strength are among the factors which has led to Citigroup Smith Barney upgrading the stock last week, pushing shares up 4.6 per cent to $5.16 over the last five days of trading.

Citigroup Smith Barney's Tim Smeallie put a $5.30 price target on the stock along with expectations that Telstra will surprise the market with its results for the six months to December 31.

"We believe the market has taken account of the cost pressures in the business but may not have factored the extent of top line growth," Mr Smeallie said.

Citigroup is forecasting 4.3 per cent top line revenue growth to $10.9 billion, while underlying earnings are expected to rise 5.6 per cent to $2.25 billion.

According to consensus estimates, Telstra will announce that sales increased 3.6 per cent to more than $10.8 billion, with earnings up 5 per cent to $2.24 billion.

Telstra is expected to declare a 13.5c interim dividend plus a 6c special dividend as part of its three-year, $4.5 billion capital return to shareholders.

Citigroup is not the only broker predicting that mobile forecasts for Telstra may be a little too conservative following the release of stronger than expected numbers from the telecom's major rival, Optus.

"We believe the risk to our Telstra subscriber numbers lies on the upside as it appears that we have underestimated the strength of the market in the December quarter," said UBS analyst Tony Wilson.

Mr Wilson said that steady average revenues per user (ARPU) from the Optus mobile business may indicate that the two mobile incumbents were weathering the pricing pressure from aggressive new capped mobile plans.

"We believe that Optus's ARPU result provides a signal that Telstra should provide a broadly steady ARPU result for the mobile division," he said.

Telstra will still have a lot of other pressing issues to address though.

Goldman Sachs JB Were said that any disappointment on operating expenditure or margins performance would probably "lead to stock price weakness" but did say that a strong result could see the stock continue to outperform.

Telstra's soon-to-depart chief executive, Ziggy Switkwoski, also promised to announce further cost-cutting initiatives after the company's recent expense cuts failed to translate to bottomline gains.

An update on the search for a replacement CEO is also expected, with Dr Switkowski, who was dumped by the board in December last year after five years in the top job, scheduled to depart by July.