Telstra's Grab For Growth Divides Pundits

Sydney Morning Herald

Saturday February 17, 2007

Matt O'Sullivan

TELSTRA's rush to boost market share in the mobile-phone and broadband internet markets "at any cost" has been questioned in a mixed report card from analysts whose advice varies from "sell" to "buy".

A 20 per cent fall in the telecom giant's interim profit to $1.7 billion this week was slightly better than the market's expectations, thanks to a pick-up in the mobile-phone and broadband businesses.

But a JP Morgan analyst, Laurent Horrut, said he was concerned that Telstra had "chased at any cost" growth in the mobile, broadband and directories divisions. Handset subsidies almost doubled and advertising spending rose by more than a third.

"We are concerned about the strategic path taken by the company," he said. "I don't think they are going to stop spending in '08."

Mr Horrut, who maintained an "underweight" recommendation, said Telstra's strategy "tends to rely on out-spending the competition", which was dangerous when competing against the likes of Hutchison, SingTel and Vodafone.

Telstra's upgrade of its full-year forecast was not enough to prompt major brokers to raise their recommendations for the stock.

Brokers emphasised the upgrade of its full-year earnings forecasts to a rise of 3 to 5 per cent was for reported earnings before interest and tax. In contrast underlying EBIT was still expected to fall marginally.

Macquarie Equities lowered its advice to "underperform" from "neutral", saying the positive trends evident in the telco's result were "more than priced in by the market".

"While Telstra has arrested the decline in PSTN [or fixed-line] revenues, it remains unclear as to how sustainable this will be," Macquarie Equities analyst Andrew Levy said in a report.

Citigroup maintained a "sell" while Deutsche Bank and Credit Suisse retained "buy" and "outperform" respectively.

Telstra also indicated on Thursday that it would maintain its full-year dividend of 28c a share in 2008. When asked whether the risk of a dividend cut had been reduced, chief executive Sol Trujillo said: "Mathematically, the answer is yes."

This led Goldman Sachs JBWere, which has a "hold" recommendation, to upgrade its forecast for the dividend from 22c a share to 28c for next year. Credit Suisse agreed a dividend of 28c was "all but confirmed" for 2008.

Telstra's ordinary shares dropped 9c to $4.45 and the T3 receipts fell 8c to $3.03.

© 2007 Sydney Morning Herald

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