Telstra's new plan confuses analysts
- — 16 August, 2010 07:58
Confusion reigns in the market over Telstra's unexpected decision to spend up to $1 billion in its latest rejuvenation plans.
Anger is simmering after the telco giant warned earnings would fall in 2010/11 because of the surge in expenditure, RBS' telco analyst Ian Martin told ABC TV.
"There's a degree of anger ... but there's more a sense of confusion (over) is this the right strategy, or would it have been better to spread that spending over a number of years," he said in an interview on Sunday.
Mr Martin was one of several analysts to downgrade Telstra's stock after the company on Thursday reported a 4.7 per cent fall in annual net profit to $3.883 billion to June 30, and issued the profit warning.
Chief executive David Thodey said Telstra would fight the rapid erosion of its market share by investing between $500 million and $1 billion in the business over three years, instead of continued cost-cutting and short-term cash generation.
The increased outlay would cause earnings before interest, tax, depreciation and amortisation (EBITDA) to fall by a high single-digit percentage in 2010/11, Telstra said.
Mr Martin said spreading the investment over a number of years would allow Telstra to smooth out a fall in its EBITDA margin instead of cutting it by four per cent in one year.
"The strategy they've got, to spend money in one year to try and build that margin back up in following years, is just too far out and too opaque for the market to buy at this stage."
Telstra's new plan amounted to a "mini transformation" hot on the heels of a major transformation from which the benefit of cost synergies has yet to be seen, he said.
Telstra reported sharp falls in revenue from its fixed-line products, and annual revenue from its public switched telephone network was down by eight per cent from the previous year to $5.83 billion.
"The decline has really accelerated in calling rates," Mr Martin said.
"That begs the question, if people aren't using their phones for calling any more, are we now going to see that rate of switch-off of lines accelerate?"
Telstra's shares finished 9.54 per cent lower on Thursday at $2.94 and ended the week at $2.92, its lowest price since May 26.
RBS rates Telstra's stock a Hold at $2.95, and has a 12-month price target of $3.24.
