O.T., but mentions PCCW -- Telstra Worth A Closer Look
Tim Knapton
03/18/2000
Australian Financial Review
Frenzied bidding in the Federal Government's GSM phone spectrum auction seems to have cast a pall over sentiment for Telstra. The fact that Hutchison Telecoms and One.Tel between them have committed some $1.2 billion 15 times more than Telstra's defensive outlays in what is only market entree expenditure, simply confirms that the competitive landscape is changing.
Telstra analysts have long factored in continued slippage in the incumbent's share of the mobile and long-distance markets but the stock has dropped 15 per cent from its late 1999 high at a time when regional telco valuations are heading rapidly in the other direction. Over the same time, for example, second-ranked carrier C&W Optus has risen by 35 per cent, mainly as SingTel and Pacific Century Cyberworks jostled for the acquisition of its Hong Kong sibling, Cable & Wireless HKT.
Telstra's fiscal 2000 EBITDA multiple looks very modest compared with that implied by the winning cash/scrip offer from Pacific Century . Indeed, it's also low compared with most other major telcos in the Asia Pacific.
While attention is focused on Telstra's domestic mobile market defences, the company is adopting a very offensive stance in constructing new business arms that not only offer significant growth but which will also provide growing adhesion to corporate telephony clients. In an acronym-intense series of announcements this week Telstra has greatly accelerated its potential rollout of business software offerings.
The company is conducting Applications Service Provision (ASP) trials with Microsoft and IBM Lotus and has formed an alliance with PricewaterhouseCoopers aimed at delivering a web-based package of enterprise resource planning (ERP) and customer relationship management (CRM) applications. Those are each burgeoning areas of corporate expenditure and, along with a revamp of the telstra.com portal, the launch of Telstra OnAir and an aggressive ADSL roll out (to provide high-speed data carriage over existing copper phone lines), they will drive Telstra's evolution from a passive supplier of telephony to an active supplier of a suite of corporate management and communications tools.
Telstra is clearly looking to replicate that expansive valour in terms of its mergers and acquisitions strategy. It seems that in addition to appraising a move into an alternative platform of data delivery through TV broadcasting, the company has also been assessing alliances with the likes of Japan's NTT. The market may not get its much-speculated new media spin-off as quickly as it desires but a series of restructuring initiatives looks highly probable as Telstra re-appraises its self-image and its commercial philosophy.
While all that's going on, the telco giant is still extracting huge investment-free cost savings from its network. The internal $650 million target for next year, for instance, is equivalent to more than 10 per cent of this year's pre-tax profit. Investors should ring up healthy returns by taking exposure during this lull in performance.
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