Telstra 3

[Lawso]

There seems to be no discussion among STers so far on the Telstra 3 share offer. Maybe posters are waiting, as I am, for the Investment Statement. I've held both TLS and TEL for many years and, like many others, am showing hefty paper losses on both. I want to hang in there without increasing exposure to the sector. I hold many more TEL than TLS so my present thinking is to sell say 4000 TEL and put those proceeds into TLS3. This will make my holdings in the two stocks roughly equal and give the opportunity to gain from further strengthening without increasing overall exposure. What do others think?

[davidrob]

Telstra (TLS)

Hi Lawson.

Good & interesting post. Many thanks.:)

What do You,-- 'fundamentally and intrinsically like'; about Telstra Lawson ??

What are your 'specific reasons', --- which you personally find attractive ?

-- And secondly, Why are you enamoured of Telstra, relative to other listed ASX Companies,as the best place... in your view, to allocate some of your investment Capital ?[?]

Kindest Regards,

Robbo :)

[Lawso]

Hi Robbo. As I said, my present intention (it could yet change) is to roughly equalize my holdings of TLS and TEL and - barring any major setback - to hold both for the medium/long-term. Why?

1. Because I regard both as core stocks (like BHP in Oz) in their respective markets. If you believe in ASX and NZX you should hold at least a moderate number of each.

2. Both will never be significantly cheaper IMO. Despite regulatory risks and competitive pressures each will at least hold its own as the dominant player, just as their incumbent counterparts have mostly done in overseas markets.

3. Both have very healthy balance sheets, single-figure P/Es and good yields - especially the TLS partly paids for the next payout.

4. After the share offer closes, majority ownership will overwhelmingly be in the hands of more than 1.5 million Aussies. No government would want to do anything drastic that would endanger the wealth of so many voters. (Mind you, that sort of thinking didn't influence Helen and her socialist mates re TEL.)

I'll leave it to the likes of Snoopy to provide a more detailed and analytical assessment. But what he has been saying about TEL on the NZX forum pretty much applies to TLS, IMO.

[moe]

Their weighting in the index may boost up a bit of demand for the shares but I dont think I would touch it with a ten foot poll due to the competition or regulation risks.

[davidrob]

Hi Lawson,


Do Be careful ... there is a minefield' of unforseeable risk regards cap ex spend and converging and new technologies out there in this 'space'....

Next point--is the latest Telstra privatised allocation in this IPO the best time to buy ?

Way I see it, .....is there is going to be a lot of expensive reducnancies and re structuring to do--and a lot of bureacracies to shed....before the overall business becomes truly efficient and productive.

Final point.

Are you aware of some of the 'legacy' billion dollar write offs in Telstra.... balance sheets.... ?

For example with Richard Lee's PCCW deal...??

Like for example the multi-Billion -- "write downs"-- (love that euphemasism, --'write downs' !!--to you and me Lawson; it would simply be a single word starting with:-- go straight to Jail and do NOT collect $200.... and you are now are:.... "b"....

So what has to happen ??

Telstra needs, imo, to build in more commercial Risk Management and knowledge ability to better assess the commerciality of the huge Bilion Dollar Investments...it needs to strategically make .....coz its track record is this respect, to date horrendously BAD. .

Bottom Line.

My own suspicion Lawson; is that there is more 'sink' and 'downward movement' in the TLS share price-- before the TLS business is either broken up -- into more profitable parts -- example SENSIS -- or run by a true managerial maverick Genius..... say ....like a Jack Welsh from America's General Electric (GE) --and that would necessarilly be a brutal and 'bloody' affair....with some radical Big Knife surgery--

And then ... a qualified "yes" for share price lift -- ?? [?]after the poisons are excised -- and the boils lanced.... first.

More pain before the gain.[}:)][:0]

Much more pain.

Just some:-- 'food for thought'.

Kindest Regards,

Robbo:)

[tommy]

quote:Originally posted by moe

Their weighting in the index may boost up a bit of demand for the shares but I dont think I would touch it with a ten foot poll due to the competition or regulation risks.


Seconded.

Plus, Telstra's intellectual property and proprietary technology portfolio is pathetic compared to its international peers (e.g., NTT) so there is little point in comparing them.

[moe]

Beware that the majority of the big brokers have a role to play in T3 also.

[Lawso]

Three very sceptical posters - but only three!. I'm surprised that on this very active ASX forum there aren't more people with strong feelings about T3 - whether for or against. Meanwhile, I'm chewing over what you guys have said and will do my own research into Telstra, which to date has been pretty superficial.

[pimpit]

brokers over here paid big money to promote this stock, govt want it gone.

[Stranger_Danger]

Sophisticated investment analysis follows (not!)

Telstra sucks, the industry sucks, the growth prospects suck, the capital expenditure looming sucks.

In other words, normally I wouldn't give it a second glance. However, I have a problem. All the people who bought T1 and (especially) T2 that I've spoken to or heard of are saying "no way!" with regards throwing good money after bad.

News reports are almost all negative, a couple printed media and television polls I've seen in the Aussie media suggest an overwhelming "no" vote by the mum and dad investors.

From what I can tell, the reasons for many people avoiding T3 has nothing to do with T3 itself - they're all looking in the rear view mirror.

I still am undecided re T3 and really can't get excited about Telstra. I must say though that the universal bad sentiment towards the T3 issue is a signal that we may be towards the low in the Telstra share price, which at least has me keeping half an eye on the stock.

[KW]

Except that most investment analysts have recently downgraded their recommendations on the stock, even though they are responsible for selling it!
One has said that it is still over-valued by 14% compared to international peers.
Revenue and EBIT growth is forecast by management to grow 2%-4%, not exactly earthmoving!
The only thing holding the share price up is the 28c dividend, which is only guaranteed this year and after that it will be cut.
Personally, the amount of financial engineering that has been done for T3 even slightly attractive makes me leery of touching it.
Not to mention that for the next 2 years there is a massive overhang in the market from the Future Fund. Also when the dividend gets cut next year and the next instalment becomes payable, there will be a lot of sellers in the market. That would probably be the better time to judge how Telstra is travelling, and to pick up cheap stock.

[moe]

Anyone taking a punt on T3?? Has been pumped to Ma and pa investors in the media quite a bit by the Aust Govt...

[troyvdh]

looking at this at a macro level is it not possible to think that the powers that be will not allow this to go pear shaped like t2 ???.I know that the oz govt has sought and got an assurance that tls wont be split and the sh have field day....but hey we are talking oz here arent we.
me i will probably buy some more
bght t1

[soulman]

Telstra has gone up in big volume the last few days. Is this to get people into T3 or since the market is at an all time high, people rather park their cash in TLS. Obviously T3 is a better alternative and I will not be suprise if the second instalment is priced at $1.80 to make it $3.90 for insto. Anyway half of the T3 shares has already been snapped up by the wealthy and with global equiteis at an all time high, maybe, just maybe there will be high demand from overseas investors.

Due to broadband, fixed line rental should not plummet as everybody thought it would.

[KW]

The selling is because the brokers are recommending that T2 holders (or post T2 buyers) sell out now that they already have their share entitlements, book the capital loss, buy the same number of T3 shares for $2 and invest the rest elsewhere until the next instalment.
Its just the wealthy doing a bit of financial engineering and is not to be taken as a new found recommendation for TLS shares.

[KW]

"Due to broadband, fixed line rental should not plummet as everybody thought it would"

In Australia we have broadband on the mobile network - currently 3.6 Mbps, going to 14 Mbps next March. Broadband will not save the fixed line.

Secondly we have a two cable networks, that do not require a copper phone line to provide broadband.

Thirdly, we also have ULL, where both phone and DSL services is provided by a competitor.

For Telstra to be successful it needs to make money from other parts of the business - eg. Sensis and other content (such as mobile TV etc). Margins in voice, broadband, and mobile are falling and will continue to do so.

[limegreen]

Ummm. Am I missing something[?] Or is Telstra just a substitute for burning your own money, since it isn't environmentally friendly to burn the new plastic notes[?]

http://img.photobucket.com/albums/v361/limegreenz/tls27oct06.gif

[soulman]

Thanks for those info KW.

So Limegreen with those graph, does TLS need to break above $4 to end the downtrend? Somewhat, I would say all the bad news is factored in the SP already but sometimes you never know. Hopefully no bad news until next year.

[limegreen]

A break about $4 would definitely be a good start. On the other hand, the mid-03 trendline break didn't really herald a particularly flash investment point. It depends whether you buy into Mary Holm's belief that the future is essentially random. This is a share that has barked for many years now, and I reckon is likely to keep on barking.

[whatsup]

Limey looks like that could be on the cards $4.00 I mean!!

[info]

Fat Prophets gives it the thumbs up.

http://www.fatprophets.com.au/content.aspx?page=Telstra

[KW]

Personally I cannot understand why anyone would want to buy into a company that is forecast to only increase earnings 2% a year for the next FIVE years, and thats if EVERYTHING goes according to plan.
Surely there are better places to park your money on the ASX than that? For instance BHP is trading on a P/E of 11 compared to TLS 15, and its earnings are forecast to grow 33% next year.

[Snoopy]

quote:
Lawso wrote
I'll leave it to the likes of Snoopy to provide a more detailed and analytical assessment. But what he has been saying about TEL on the NZX forum pretty much applies to TLS, IMO.


After that I almost feel obliged to try to say something intelligent on T3 Lawso! You might have to accept some 'partly intelligent' comment. Because unlike Telecom NZ, where I have delved into the workings of that company in huge detail, my workings on Telstra are, so far, more superficial.

My main concern about Telstra is the rate of decline in traditional fixed line (PSTN) revenue (6.7% during FY2006). The equivalent decline in New Zealand for for Telecom NZ PSTN revenue was 3.1%. This 'underperformance', relative to Telecom NZ, is serious. Although the old Public Switched Telephone Networks are declining worldwide, they are still the largest and amongst the most profitable revenue streams for incumbant Telcos. A sharp decline in traditional revenue streams tends to hit the bottom line very hard very quickly.

Part of Telecom NZs advantage in NZ, compared to Telstra in Australia is that Telecom NZ does not charge for individual local PSTN calls. That means when we users substitute mobile calls for fixed line calls, the income from the fixed network decreases in Australia whereas it does not in New Zealand.

On the subject of competition in general in Australia Telstra have to deal with a third substantial nationwide competitor, - Optus. There is no nationwide third player of equivalent scale in New Zealand competing across all facets of the business.

Both Telecom NZ and Telstra face very similar regulatory issues in their respective home markets.

Both companies are improving their competiveness by reducing staff. Telstra has 49,443 workers as at the last balance covering $A23.1b in revenue ($467,000 per employee). Telecom NZ has 9,136 workers covering revenue $NZ5.8m ($634,851 per employee). So despite the recent Telstra redundancies, superficially Telecom NZ is still easily the more efficient company.

I hold shares in both companies (TEL and TLS). But my holding of Telecom NZ shares in dollar value is greater by far than what I hold in Telstra. There is a simple reason for that. I believe that Telcom NZ offers better value. But that doesn't mean Telstra and in particular T3 is poor value. I intend to continue to have a 'bet each way' and take up my T3 allocation. Adding perverse support to my position go to any forum where the merits of T3 is discussed and the noisy market view is that T3 is best left alone. That view is a magnet to a contrarian investor like myself!

SNOOPY

discl: hold TEL, TLS and soon T3

[moe]

Snoop dog

When I took the plunge across the ditch i had no idea local calls would be charged. Had always taken it for granted in NZ and can remember i was quite surprised at the time. Certainly use my mobile a lot more across here so agree with your point there.

If you dont mind me asking, roughly what % of your overall portfolio will your holdings be in telecommunications? Im just curious.

Cheers

Moe

[Snoopy]

quote:Originally posted by moe

Snoop dog

If you dont mind me asking, roughly what % of your overall portfolio will your holdings be in telecommunications? Im just curious.

Cheers

Moe


Moe, I am a value investor with a natural slant towards utilities at the moment. Guess what utilities have been cheap over the last year or so?

As far as utilities go, I am overweight in telecommunications shares.
Nevertheless I regard myself as a little light in utilities overall. So I am quite comfortable with where my Telecommunications holdings sit.

At the start of the financial year I had O2 and BT (both UK based), Telstra and Telecom NZ. O2 got bought out and I switched that money into Telecom NZ just in time for the unbundling disaster :-(. I managed to buy some more Telecom shares at rock bottom prices with some other money I had, which helped balance my unfortunate earlier timing. There are some new draconian tax rules as regards 'overseas' (means not Oz or NZ) shares coming for NZ taxpayers. That means my holding in BT is soon for the chop :-(. In some ways my consolidation into Telstra via T3 will be replacement for this BT investment when it is sold, being in the same global sector.

That means come the end of the year, despite my apparently rampant buying, I plan to still have about the same value of Telecommunications shares that I started the year with. I think my total investment in Telecommunications is about 15% of my overall portfolio. Does that sound a lot?

Try buying a New Zealand index fund and you get a 20% telecommunications weighting, solely from the funds holding of Telecom NZ shares alone!

SNOOPY

[Snoopy]

quote:Originally posted by KW

Personally I cannot understand why anyone would want to buy into a company that is forecast to only increase earnings 2% a year for the next FIVE years, and thats if EVERYTHING goes according to plan.
Surely there are better places to park your money on the ASX than that?


This is actually a very good question. One that Snoopy thinks deserves a good answer, so here it is....

Telstra had just announced a profit of $A3,181m. That includes a provision for restructuring and redundancies of $A427m. That means the real underlying profitability assumning a 30% tax rate is:

$A3,181m + (0.7)x $A427m= $3,480m or 28cps

At the end of September 2006 Telstra closed at $A3.60, six weeks or so after the annual result had been digested by the market, an ongoing PE ratio of 13.

If we go back to 1999, Telstra produced a very similar headline profit number of $A3,486m or 28cps. However the share price on 30th September 1999 was $A7.94. That gave a PE ratio of 28!

I think these two comparative sets of figures deserve more than a moment's contemplation.

The profit barely changed in seven years yet the TLS share price more than halved! The halving of share price is not a reflection on the 'quality of profits' - indeed the profits now are probably of higher quality than the internet boom profits perceived to be floating around in 1999. No, the difference in the share price between 1999 and 2006 is due to the perceived *potential* of what is going to happen next.

In late 1999 'dot com fever' was gaining a grip and the profits expectations of any companies with associations to the internet were going through the roof. Thus a PE of 28 for a dominant Telco, in what was perceived as a rapidly expanding profit pie was perceived as dead cheap. Fast forward to 2006. Now the spectre of government regulation, cut throat competition and expensive capital spending have turned expectation right around. To the extent that it is hardly obvious where *any* growth in profitability within TLS will come.

Now fast forward another seven years to 2013. Let's says the Telstra profit has remained flat at $A3,500m. Anyone want to hazard a guess at what the share price will be? That is an impossible question to answer definitively of course, because no-one knows what sentiment will be floating around the market in 2013. But I will make a guess and say somewhere between $3.50 and $8 ;-P. Actually I wouldn't put too much credence on the $8 'high bound'. But lets say some big US Telco comes in and bids $6 for a cornerstone stake. Quite possible, even highly likely once the Oz government has fully relinquished control of TLS in two years time.

$6 represents a $2.40 or 60% premium on today's share price. But that $2.40 is a more than 100% premium on the partially paid share price. So can you now see the potential of buying TLS warrants today?

Of course a $6 partial bid is not certain, so one needs to consider what happens if Telstra blunders on producing flat profits and continues to carry a low rating by Mr Market. What happens is the share/warrant price remains flat and the long suffering shareholders are 'stuck' with a dividend yield of some 7% -hardly shabby.

We have here is a classic investment play under conditions of uncertainty. If at some time in the next few years a partial bid is made, we walk away with a 100% return on T3. If not, we walk away with 7% pa on our investment, far better than is available at the bank. Ok I have simplified things a bit. But as I see things, this is a really good risk return trade off.

How could anyone contemplate *not* buying T3 when the potential deal on the table is so sweet? You would have to be *insane* not to buy T3 wouldn't you?

[quote]<font size="1" face="Verdana, Arial, Helvetica" id="quote"

[KW]

Firstly, the Telstra dividend is only 28c for this financial year. After that it will be cut, and as they have not said to what level, you are totally guessing what the dividend yield will be in the future. (I note that TNZ have just announced a reduced dividend as well).

Secondly, there will be no takeover offer from a non-Australian company. Government legislation prevents total foreign ownership greater than 11.67% of the company, or any one foreign owner from owning more than 1.67% of the company.

[Snoopy]

quote:Originally posted by KW

Firstly, the Telstra dividend is only 28c for this financial year. After that it will be cut, and as they have not said to what level, you are totally guessing what the dividend yield will be in the future. (I note that TNZ have just announced a reduced dividend as well).


I think Sol has said that the dividend of 28c cannot be guaranteed beyond FY2007. He hasn't actually said it will be cut. Telecom NZ has cut their ordinary dividend, that is true, from a nominal 40cps to a nominal 28cps. But if Telecom NZ sell their Yellow pages division as planned, a substantial capital return is expected on top of that. Telstra might choose to do the same by flogging off Sensis.

Even if the Telstra dividend *is* cut in FY2008, and personally I think the odds are it will be, that isn't necessarily a bad thing. If Sol needs to cut the dividend for infrastructure investment he is on record as saying that he will only invest if he can get a decent return for shareholders on the money. He may well come to a 'fair value' charging agreement with the government that is in the interests of shareholders.


quote:
Secondly, there will be no takeover offer from a non-Australian company. Government legislation prevents total foreign ownership greater than 11.67% of the company, or any one foreign owner from owning more than 1.67% of the company.


You are right about there being legislative restrictions but wrong about the numbers. Look at page 55 of the T3 prospectus, and section 5.13. The single foreign person limit is 5%,and the foreign person aggregate is 'no greater than 35%'. That still leaves room for a loose consortium of foreign telecommunications interests to go for a 20% stake.

SNOOPY

[whatsup]

Counting down--------- to opening, whats the oil on the opening quote?

[pimpit]

Telstra shareholder ejected from AGM

A TELSTRA shareholder was physically thrown out of the telco's annual general meeting today as he disrupted the opening remarks of chairman Don McGauchie.

The shareholder, Kenneth Ivory of Brisbane, stood up in the meeting and threw a handful of papers at the feet of Mr McGauchie.

Mr McGauchie asked Mr Ivory to leave and when he did not, Mr Ivory was physically removed from the meeting by security guards.

Protesting that he was being assaulted, Mr Ivory was taken by two security guards on either side of him and physically pulled from the hall in the Melbourne Convention Centre, where the meeting was taking place.

Mr McGauchie said Mr Ivory had unsuccessfully tried to sue Telstra and owed Telstra $400,000 in court costs.

"I do not want him disrupting the meeting of shareholders," he said.

Mr Ivory was surrounded by security guards as he objected to being thrown out.

"Leave me alone. That is assault. Don't handle me," he said as two security guards pulled him away.

"I'm a shareholder, I've been invited here."

Mr Ivory claimed outside the AGM the Telstra meeting was illegal.

"They are concealing substantial debts from T3 investors," he said.

"The meeting today must be adjourned."

Mr Ivory said the papers he had thrown at the feet of Mr McGauchie comprised a statutory demand of Telstra.

He said it related to an alleged concealment of debts since 1994.

[soulman]

T3, (sounds like a Terminator movie) - Opening quote, very favourable and closing on the days high when the market dived 88 points is encouraging.

Share allocation to retail investor on the entitlement offer, I assume have not yet been allocated to their respective CHESS because I haven't got mine yet. Friday is the day, is it?

Glad I sold Telstra for $3.92 a few weeks ago.

[soulman]

Great opening week for TLSCA. A bout of profit taking ruin the party yesterday and when allocation are allocated to retail shareholder next week, interesting to see what will happen. I was in T3 for a quickie and that will be the case for me. TLS is never a long term investment. With Qantas approach, TLS also have attractive infrastructure but both have foreign limits shareholding.

I just hope no one was shorting QAN before those approach. Just imagine I bought QAN at both $2.92 and $3.26 about 4 months ago and sold them at a steal.

[soulman]

Anyone bought the T3 float?

Sold 2 third of my holding for $2.41. Again way too early to watch it gain 10 cents in 2 days time. Overall great investment for my 10000 shares. I bought some more T3 on my mums account and I sold that one even earlier, although only a week ago. I have a bad habit of selling a day or two too early, judging by the rise in share prices after I sold.

[mark100]

Never thought this would happen but I bought a few TLS today. Lots of cash flow and high FF yield at current prices. I would also argue thats it is moving back towards having a monopoly given the crap coverage its competitors provide

[cantab]

Didn't hold this one but purchased some this morning as I like the dividend yield. Also I see the company is aiming to increase free cash flow from $4.4b this year to $6b in 2010

[Arbitrage]

Now that the government has finished unloading some of its remaining shares for awhile I was hoping the share price would settle and begin a steady upward climb. Its fundamentals look good, and hopefully the new CEO is developing a better relationship with the government. Dividend is due soon too.

[Arbitrage]

While not one of the glamour stocks, looks like the sp is definitely heading in an upward direction. A bit of action on the company books as well.