Telstra provides telephone and communication services and has a dominant position (75 per cent) in the Australian telecommunications market.
Profile
Telstra provides telephone and communication services and has a dominant position (75 per cent) in the Australian telecommunications market. Overseas revenues are only 6 per cent of total sales. It has a market capitalisation of $30 billion, which is the potential market value of the Government's 50.1 per cent stake.
Pay TV has been its major divergence away from its core products, with a 50 per cent share of Foxtel. Internationally its joint venture with Hong Kong-based Pacific Century Cyber Works (PCCW) has cost the company billions of dollars in unrealistic valuations of assets.
Current details
The sharemarket is widely expecting the company's full-year net profit to be about $3.84 billion, marginally below last year's $3.99 billion. With slightly better economic conditions expected for 2004, experts forecast a modest increase in profits to about $4 billion. This puts the company on a P/E ratio of 14 to 14.5 times.
Telstra is still reducing its workforce, which will reduce costs, but it is lack of growth opportunities that holds back bigger profit increases. The mobile phone market has reached saturation levels and cost-cutting will only maintain profits.
Telstra management has stated capital expenditure will decrease (due to reduced competition) over the next year. This plus cost controls will improve cash flow, leading to higher dividends. Essentially Telstra looks like a utility company. Ever since it listed it has been labelled a growth stock, but it is stagnating. Because of its dominance locally it cannot grow dynamically. It needs to expand successfully offshore to generate above average profit growth.
Sector
Comparing Telstra to overseas listed telecommunications companies (telcos) sees its P/E ratio in line with similar US (14 times) and European (15 times) companies. However, it appears to be cheaply priced, as Telstra's 5.5 per cent dividend yield is high - nearly twice Europe's (2.8 per cent) and 50 per cent more than US telcos (3.6 per cent). Also, overseas telcos do not have a 50 per cent government shareholder that could be a potential seller. Any change of government policy creates more uncertainty.
Worth buying?
While T3 is off the political agenda Telstra will be attractive as a yield stock (5.5 to 6.2 per cent fully franked). But if T3 materialises, the price will remain weak from the large number of shares issued (6.4 billion), at a discount to ensure completion.
Geoffrey Hill is presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit www.ghill.com.au
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