Telstra
lifted their trading halt early yesterday afternoon instead of waiting
until this morning. The stock fell 30c or 7% to 402c in the afternoon.
Not a great reaction to their seven hour presentation after 4 months of
preparation.

The headline this morning could be “Telstra
reveals bold new strategy” or “Telstra profit warning”. Take your pick.
Here are some of the comments this morning having dealt with the detail
yesterday:

Forecasts rubbery: Telstra emphasising that
all plans rely on a “reasonable” regulatory environment …”this is
what we can do given the chance”. In other words the forecasts they
made yesterday, unsexy as they are, depend on a change in regulatory
environment and are therefore still rubbery. The comment from Helen
Coonan this morning might help “I think in the end we have to accept
that the government doesn’t run Telstra” – implying that they did under
Ziggy Switkowski.

Ambitious plan:
The transformation of
Telstra is being described as the most ambitious corporate restructure
ever taken in the world. “If we pull it off,” says Solomon Trujillo. In
other words a lot of what were heard yesterday was hope, not reality.
You can’t rely on the targets.

Dreaming:
Solomon
Trujillo’s wish list of doubling revenue of Sensis (taking on Google?!)
and having 35-30% of revenues from new products is as fanciful as my
daughter putting down “Rabbit” on her Christmas list.

Telstra sale won’t happen:
If
the government are looking for 525c to 560c for their Telstra stake
then T3 is not going to happen anytime in the next few years, no matter
how they re-jig the numbers. The public just won’t be interested. Helen
Coonan was on the ABC this morning saying “What we’ll do is have a look
at it early next year and decide how to proceed”. Meanwhile the
government stake sits as a big overhang on share price performance. The
likelihood is that the stake will now find its way in the government’s
Future Fund and whilst there will remain a burden on the share price.
The Future Fund doesn’t want 75% of its assets in one stock – they will
be a seller.

Broker dilemma:
Some brokers have a bit of
a dilemma. Do they give away any hopes of a fee from selling Telstra 3
and speak their minds, or do they hold onto their HOLD recommendations
and hedge their bets on upsetting the corporate department’s ambitions.
A lot of brokers have given up the hope of fees:

  • CSFB retains an OUTPERFORM recommendation.
  • Merrill Lynch has a SELL.
  • Goldman Sachs JB Were have cut from MARKET PERFORM to UNDER PERFORM.
  • UBS Warburg retains a NEUTRAL recommendation.
  • Macquarie downgrades to UNDERPERFORM.
  • Citibank Smith Barney Stays with a HOLD.

Broker downgrades: Broker earnings numbers this morning include:

  • A 13% downgrade for the next 3 years from Goldman Sachs JB Were.
  • UBS Warburg have left their numbers unchanged for the moment.
  • Citibank Smith Barney have downgraded by 23%, 22% and 21%.
  • CSFB have left forecasts unchanged.

Broker valuations: Broker valuations seen this morning include:

  • Goldman Sachs JB Were at 460c.
  • UBS Warburg 450c.
  • Macquarie at 375c.
  • Merrill Lynch at 383c.
  • Citibank Smith Barney expect it to trade in the range 360c to 400c. Have a 375c target.
  • CSFB has a 478c target price.

Broker comments:

  • Goldman Sachs JB Were says the plan is “ambitious, necessary,
    courageous, expensive, enormously risky, returns dilutive”. They say it
    will be 12 months before the market gives them the benefit of the doubt
    on delivery.
  • Merrill Lynch say that 2010 is just a “Bridge too far”.
  • UBS Warburg say this is a “trust us we’ll get it right” story
    and that the profit downgrade from the company was because of changes
    in one off items not operational EBIT and that if Telstra achieve their
    goals the 2010 free cash flow is 35% above their forecast.
  • Aspect Huntley say it is “hardly a growth story” and with a
    7% yield at 400c Telstra becomes a yield stock. The carrot is $6-7bn of
    free cash flow in 2010 if all goes to plan.
  • Macquarie say “The cost of transforming Telstra into a lean,
    innovative, customer focused and state of the art communications
    company is far greater than we (or the market) had anticipated”. They
    say forecast are “possible, probably not probable”. Reasonable
    regulatory outcomes are not likely.
  • Citibank Smith Barney see a favorable regulatory outcome as highly unlikely.
  • CSFB say “Despite the continuing uncertainty in the regulatory
    environment, our analysis suggests that significant operational cost
    savings are achievable for Telstra. We view that this will be the key
    earnings driver in the near term”.

Christmas party: The
sale of T3 and the associated broker fees can no longer be relied upon.
The Corporate Departments of most major brokers will this morning take
a leaf out of Sol Trujillo’s book and cancel the French Champagne and
caviar ordered for the Christmas Party. Staff contributions for a beer
and skittles night look more appropriate (probably still manage a few
bottles of domestic Champagne – it was a good year for deals).

Not a growth stock:
Telstra
officially lost all chance of regaining any sort of “growth” premium in
its share price with the forecasts yesterday. Ambitious as the plan is,
the net result – 3.0% to 3.5% compound growth – is not worth waiting
for.

Not an income stock:
If the only reason to hold
Telstra is as an income stock then the comment has to be that you could
do better elsewhere. They are still going to pay a 6c special dividend
in March but there will be no other specials or buybacks and there is
no guarantee of anything more than a 28c dividend for the next three
years. After that there is complete uncertainty. It is even losing its
shine as an income stock.

Watch out the rest: If
Telstra is really going to drive their broadband market share from 41%
to 60% in the next 2 years then they are going to be putting the
squeeze on all the other companies trying to sell broadband packages
over their network (or another network). Not good for Optus. This
business is going to become very competitive and some of Telstra’s
competitors will struggle to survive.

Invest in the rest:

Telstra are planning $10bn of capex between now and 2010 yet they are
reducing their staff by 20%. The point being they are going to spend a
lot of money and some companies will boom because of it. Haven’t done
it yet but you ought to be thinking about companies that do work for
Telstra.

Hype over job cuts:
A fuss is being made in the
media about the announced job cuts – not a great day to announce them
on the day of protest action on IR reforms with Greg Combet getting
hours of prime time TV (10-12,000 jobs to go over 5 years).

Watch out for stop losses:
The
word has gone about that there are massive stop loss orders ready to
trigger if Telstra goes under 400c today, in other words if it crosses
400c it will, at least in the short term drop harder.

Credit rating: Talk of Telstra’s credit rating being downgraded on the back of yesterday’s presentation.

All
in all the question is this – Do you trust Telstra? The answer from the
majority of clients and colleagues this morning appears to be that we
have all lost enough money doing that and there are better places to
get a decent yield, which is about all that’s certain about Telstra,
and even that only has a three year guarantee.

THE MORNING
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