Telstra Corporation (TLS) Update

Submitted by Craig Strzelecki on 12 March, 2007 - 04:03

Telstra Corporation (TLS) have a maintained Sell rating from analyst Citigroup Investment Research (CIR). The analyst considers telecommunications giant Telstra could be worth more than $5.50 if the fixed line business was restructured under a NetCo/ServCo model. However in this report the analyst estimates that there is only 2cps of value accretion. Simply applying Utility and Retail EV/EBITDA multiples raises their SOTP from $3.87 to $5.60. NetCo can support much higher levels of gearing given its utility style attributes and Utilities typically trade on EV/EBITDA multiples of 8-11x vs Global Telco average of 6x-7x. NetCo should trade at a 25 - 35% discount to the utility average given its higher technology risk. Any uplift in valuation is counteracted by a significant increase in competition for ServCo with other operators having equal access for delivery of voice and broadband services. The gearing benefit from NetCo is offset by lower Sales and EBITDA under new regulated return regime consistent with utility style post tax allowable ROIC of 8%. CIR place a less than 20% probability on a NetCo/ServCo model given: (1) the limited value accretion; (2) the extent of the overhaul of the Australian telco regulation; and (3) management's opposition (especially with the prospect of much stronger competition to ServCo). Telstra has underperformed ASX- 200 by 7% in last two months and the ETR has increased from -8% to -0.9%. The negative expected share price return is now almost offset by the expected dividend yield.

Telstra Corporation Limited is listed on the Australian Stock Exchange (ASX) under stock code TLS. You can view their investor website here. TLS was listed on the ASX on 17 November, 1997. Donald McGauchie is the chairman of Telstra and the managing director/CEO is Solomon Trujillo. The company is a telecommunications Carrier and provides telecommunications and information services, including mobiles, internet, and pay television. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade TLS. Check your charts and good luck with your share trading!