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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.



TelstraTelstra (TLS:ASX) 2006-04-04

When it comes to broadband, it has taken a lot longer to roll out than was initially anticipated.
Shares of the big telecom companies have been badly hit, as a consequence. AT&T, Verizon, BellSouth, and SprintNextel in the U.S are down about 70% in the last six years. Vodafone and BT in the U.K didn’t fare much better.
Australia's Telstra has been no exception. There was a lot of hype a decade ago, but Telstra turned out to be another big, lumbering phone company, just like the rest of the giants. Like many ex-monopolies, the company comes in for a lot of stick in Australia. But this company deserves a closer inspection:

Telstra still provides virtually all the infrastructure in Australia. They used to have a monopoly here and they still retain millions of customers.  It took a while, but the dream of wireless internet and broadband everywhere is now here, in Australia.  Telstra is still the leading provider, adding more than 600,000 broadband customers in the last six months of 2005. In terms of sales, that equates to AU$900 million worth of sales in the last half of 2005. This is an increase of 42% from the same time frame the previous year.
But the mobile phone business is larger than broadband right now, and Telstra also has 44% of this industry in Australia. Telstra has competition from Vodafone and Optus, in the mobile market, but is still by far the largest player here too. Despite the big market share, everyone hates the stock. The public and the brokers alike.
We believe that Telstra has been oversold and the negative sentiment has been overdone.
Telstra has finally woken up and is changing its ways. Currently they have a program in place to try to win back customers that have been lost to competitors. Telstra has brought in a CEO from the U.S., who immediately surveyed 22,000 Australians, to get to the bottom of what Telstra was doing wrong.
It's primarily their image. Telstra is seen as the big monopoly, with high-priced plans and an attitude to customer service. These are some of the reasons why this company's shares have been savaged lately. But these are all things that Telstra can easily remedy. If it does improve its image & give customers the plan prices they want, then it will win back customers and this will be reflected in their share price.
There is another important factor that has'nt been considered yet. Holding 52% of the shares, the government of Australia is the majority owner of Telstra. This makes things very difficult when unpopular corporate decisions have to be made. The new CEO believes that Telstra should retrench 12,000 employees between now and 2010. But with the government on his back, this will not be easy to do.
However; the Australian government wants to sell its stake soon.  The government knows the shares are cheap right now, and the government, of course, wants to get maximum value for its shares.
The Government's stake is currently worth about AU$20 billion dollars. As you can imagine, the government is going to do it's best to pretty up Telstra before it sells its stake. The tentative plan is to groom Telstra now, so the government can sell its stake around November 2006.
With this time scale in mind, Tesltra shares at below AU$4 look like too good a bargain to pass up.

There are a number of similar scenarios that we can look at from the recent past:
When the German government sold Deutsche Telecom, the business was outrageously overpriced, and yet the stock offering was totally oversubscribed. Germany was able to sell their Deutsche Telecom stock for a fortune.  Look at what happened with New Zealand Telecom. Once the New Zealand government finally sold their majority stake, the stock rocketed up hundreds of percent, as investors realized that the company would finally be able to cut jobs and trim the fat.

It is hard to say how the sell off in Australia will play out, but we do know that once the government sells its stake in Telstra, Telstra's weighting in the ASX stock index will double. It will then make up roughly 5% of Australia's benchmark stock market index. Fund managers in Australia will be forced to at least double their holdings to be in line with Australia's benchmark stock index. This will inevitably cause money to flow into Telstra.
At current prices, below AU$4 per share and paying a dividend of 7%, Telstra has got to be a bargain. 

Buy Telstra (TLS:ASX) up to AU$4. Collect a nice 7% dividend whilst you are waiting for the inevitable share price increase.

Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.