Faint-hearted Tips For Telstra

Sydney Morning Herald

Tuesday September 20, 2005

Edited by Scott Rochfort xchange@smh.com.au

The worst may be over, say some analysts, but they're not issuing any 'buy' listings.

They say misery loves company and so do profit downgrades, by the looks of it, as Optus joined its larger rival, Telstra, on the downgrade path yesterday.

But while the Optus news dragged on Telstra's share price, a few analysts are finding glimmers of hope following Telstra's recent plunge.

UBS appears to think that the worst could be over for Telstra's share price, which is looking relatively cheap at current levels on the basis of the telecom's price to earnings, discounted cash flow, and sum-of-parts valuations.

"Sentiment regarding the competitive outlook for mobile and [corporate] business is unlikely to get materially worse in our view; we see limited risk from the upcoming regulatory decisions and we believe that new management is likely to be conservative in its forecasts," the broker said.

Deutsche Bank is looking to the new Telstra chief, Sol Trujillo, and his upcoming strategic blueprint to give the stock a boost.

"We believe there is scope for fundamentally positive changes to flow from this review," Deutsche's Richard Long said.

Deutsche noted that Telstra had not exactly set the world alight in the productivity stakes and said "a 5 per cent increase in employee productivity across across Telstra's 46,000 workers could enhance financial year 2006 net profit by almost 5.3 per cent".

But neither broker is willing to bank on any upside yet. Deutsche has a "hold" recommendation and a $4.40 price target, while UBS has a "neutral" recommendation despite a $4.75 price target. This is well above yesterday's close at $4.46.

UBS said it would be "risky" to move to a "buy" rating. While Trujillo's October strategy statement could create shareholder wealth in the medium term, the markets may focus on the short-term pain which could include negative earnings and cash flow growth, which will have dividend implications, according to UBS.

Foster's in session

Foster's recent $3.7 billion purchase of Southcorp will come under its severest scrutiny yet when the company gives its much anticipated "Strategy Session" to analysts in Sydney tomorrow.

The five-hour session will be opened by chief executive Trevor O'Hoy and feature presentations by Foster's wine estates boss Jamie Odell, beer man John Murphy and Rick Scully of Foster's Brewing International.

Despite the beverage group already stating it hopes to realise up to $145 million in annual savings from the Southcorp acquisition by mid 2008, it will have to display to the market tomorrow how it will actually go about it.

The presentation will be the biggest hint yet of O'Hoy's long-term vision for Foster's.

One key element in tomorrow's briefing will be how it will boost the profitability of its long-underperforming wine business. It has aimed to get a 11 per cent return on its wine assets by 2007-08, which Credit Suisse First Boston says translates to the division making a $825 million pretax profit. This compares to the $248 million it made pretax in 2004-05 (before taking the Southcorp acquisition into account).

CSFB reckons a key to Foster's achieving this profit figure will be volume growth. It says Foster's will have to grow wine sales 9 per cent a year to achieve this. The broker reckons Foster's shares could be worth $7.50 in 18 months if all goes to plan.

Foster's shares closed 4c higher at $5.82 yesterday.

Action stations

Lend Lease has been anything but idle since GPT unit holders voted to go their own way in June. And the activity has not been lost on investors and analysts who have upgraded earnings for the 2006-07 year. Credit Suisse First Boston says, for investors, the ##261 million ($616 million) of the UK-based Crosby Homes has been the group's most material news in this past quarter, followed by the long-term $1 billion project at Wiltonannounced last Friday.

CSFB says it expects the news flow, such as the Wilton deal, to continue. The only grey cloud for Lend Lease is the dispute it has with GPT and Westfield over its retail arm's pre-emptive rights for the Sunshine Plaza shopping centre in Queensland.

The parties went to court two weeks ago and await the judge's decision.

Goldman Sachs JBWere last week upgraded 2006-07 earnings by 8.5 per cent and by 9.5 per cent for 2007-08. Its property analyst, Simon Wheatley, says "we still believe that our projections are more on the conservative side and that normalised risks are neutral or on the upside with respect to growth rates. Our recommendation remains neutral at this stage as we can't help but be cautious about a low margin business in the volatile global costs environment currently being experienced.

"Lend Lease [has] however, made a significant strategic change this year, moving from a rationalising and capital management strategy to an expansionary and capital deployment strategy. This underscores a more defined business plan and further capital deployment/acquisitions will likely lead to earnings upgrades."

© 2005 Sydney Morning Herald

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