Telstra Corporation

Telstra Corporation (TLS) has a target price of $4.90 and an Outperform recommendation from Australian Stockmarket analyst Macquarie Research Equities.

Telstra Corporation (TLS): Do You Own a Mobile Phone?

Telstra Corporation (TLS) have an upgraded share trading recommendation to Hold and an increased price target of $4.25 per share from market analyst Citigroup Investment Research. The analyst's forecasts are predicated on intensifying fixed line competition in 2HCY07 which could prove optimistic. Consequently they have revised their scenario analysis and now attribute a 30% (cf 5%) probability to the “Bull Scenario” that competitors gain minimal traction. CIR anticipate a sentiment shift over the next six months with; (i) 2H07e result with +40% EBIT growth; (ii) the possibility of TV show downloads to mobile & PC; (iii) upgrade of HFC to 30Mbs, and (iv) Nokia handsets in the Dec half counteracting regulatory risk in the short term. The analyst no longer expects TLS will subsidise 1.7m CDMA subscribers. It may actively migrate less than 50% of its CDMA base which sees our FY08e & FY09e NPAT increasing by 5.6% & 6.4% respectively. Telstra is creating a broadband barrier to entry on supply side (e.g. 30Mb/s upgrade on HFC). However they still don't have visibility that consumer demand will deliver the revenue & margin to fill the gaps. The analyst analysis suggests mobile or broadband ARPU's need to grow between $4 and $26 per subscriber and generate 70% - 80% EBITDA margins across 50% of the subscriber base to meet management’s revenue and margin targets by FY10e. A regulatory failing despite access pricing for competitors falling 67%, the competitive threat in fixed line appears to be stalling, giving rise to a potential overhaul of current telco regulation.

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.

UBS currently rates Telstra Corporation (TLS) with a Neutral 2 recommendation with a share price target of $3.85. UBS values Telstra at $3.85, based on FY07E DCF-based valuation. Telstra Corporation Limited is listed on the Australian Stock Exchange (ASX) under stock code TLS. Check your charts!