General | Feb 04 2006
Last week Morgan Stanley, after a prolonged period of negativity, lifted its rating on Telstra (TLS) from Sell to Hold, sparking an 11c rally on the day. It seemed that with the stock in the mid $3s, downside was looking more limited than upside.
Today UBS has dropped its earnings estimations for Telstra, resulting in the analysts’ target price falling from $4.40 to $3.80. This would appear to somewhat run against the grain of the recent improvement of sentiment for the troubled telco. Or are they just catching up?
A look at the FN Arena database shows UBS joins two other brokers in the under-$4 club, leaving three in the over-$4. The remainder either don’t set targets, or don’t set targets when the recommendation is Sell. There are 3 Sells and 5 Holds, with one outlier being Credit Suisse with a lonely Outperform rating and a target of $4.78. Mind you, CS has been quiet on Telstra since early February.
UBS’ reasons for the valuation reduction are based largely on the uncertainty of unresolved issues, although there are both positives and negatives amongst them. The analysts have extended their forecasting period out to 2013 to better harness the (should we say “futuristic”?) developments in telco technology, the impact from which no one can honestly predict at this stage.
They include Voice over Internet Protocol (VoIP), Fibre to the Node (FTTN), Unbundled Local Loop (ULL) and Next Generation Network (NGN).
UBS can’t see Telstra managing to get all its mobile customers to migrate to 3G by June 2008 without, perhaps, having to simply hand out sexy new handsets. However, the transition to NGN which sees a change from old-fashioned telephony to IP, and incorporates 3G, appears to offer more cost reductions than first thought.
Other good news is that the pall surrounding an underperforming Bigpond seems to have lifted, such that UBS notes a better-than-expected take-up of Telstra’s broadband services.
On the not so good news side is the threat from VoIP, which could seriously put the final nail in the fixed-line telephony coffin. Then there is the whole ULL issue, upon which brokers tend to disagree. The fact remains, what the ACCC comes back with in terms of fees for other providers to use Telstra’s existing network is a real make or break factor. There is little consensus on what these figures will be.
Finally, there is the pending rollout of Telstra’s FTTN network, which will speed up information delivery but will also have to come under the scrutiny of the ACCC.
As a half-private, half-state-owned entity, Telstra will always be dragging a ball and chain. Even if the government sold T3, the regulator will still have its say. Throw in the fact that technology is changing so fast everything new quickly becomes “so five minutes ago” and it is not hard to see why brokers highlight uncertainty as the pervading factor in Telstra share price valuation.
