Telstra (TLS) Share Trading Recommendation

Submitted by Craig Strzelecki on 3 May, 2007 - 18:23

Telstra (TLS) has an upgraded share trading recommendation of Neutral and an increased share price target of $4.40 per share from sharemarket analyst Macquarie Research Equities. The telco sector has outperformed the broader market this year, as investors switch into defensive stocks offering high dividend yields. Telstra (TLS) has gained 17% this year so far (vs 10% in the S&P/ASX200), in addition to delivering a 14 cent dividend on the 14th February. Further positive news arrived this morning, with New Zealand's largest listed company, Telecom Corp (TEL), posting a better-than-expected 7.2% rise in third-quarter profit, due to higher mobile and Internet earnings, and said it would return NZ$1.1 billion to shareholders. Taking into account the fact that this is an election year, and having examined and reviewed their valuation for Australia’s largest telco, TLS, the analysts have put through the following upgrades: The appetite for a high speed fibre network (FTTN) is building: It is clear that, in an election year, both major political parties are keen to deliver Australia a high-speed broadband network. Telstra is the best placed telco to build such a network, but also has the most to lose by building it. That is, Telstra would have to forego its existing copper network returns), which provides an interesting dynamic that will play out over the next six months. The dilemma remains that there is currently little financial incentive for Telstra to build an FTTN network: Given the ~$3.5bn of capital that Telstra would need to commit to build fibre-to-the-node (FTTN), the critical issue remains how Telstra could recoup a return on that investment in light of the returns it currently enjoys on its copper network. Based on our conservative assumptions, we estimate that the investment case for FTTN currently only makes financial sense (on ROIC, NPV and EPS measures) if Telstra can increase its earnings per broadband line by around $16/month. Therefore, it appears increasingly likely that Telstra will be offered a "carrot" to build a FTTN network for Australia. The carrot could take the form of higher network returns, a government subsidy on the build (more likely on the regional build rather than the metro component), or compensation in some other area (eg recognising Telstra's claim that a significant rural deficit exists). The analyst estimates that such a carrot could add as much as 50cps to their valuation. This is relative to the analyst's existing bearish fixed line assumptions, and would reflect the direct impact of a pricing outcome or subsidy, as well as the second order impacts of Telstra moving to a fibre to the node platform. These second order impacts include reduced competition from ULL and line sharing services. Any update on fibre to the node would be a positive, while there is little downside risk to FY07 earnings guidance. There is no clear signal from the government as to whether or not it will provide such a carrot. However, the analysts believe that as the pressure builds to deliver a high speed broadband solution the risk of such a deal being done is great enough that we have included the associated 50cps valuation uplift in their target price, which moves to $4.40/share.

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!

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