Asian Stock Focus: Govt Sale Haunts Australia's Telstra
By GRAHAM MORGAN
Of DOW JONES NEWSWIRES
SYDNEY -- The prospect of the Australian government flooding the market with shares in the long term and almost flat revenue growth in the short to medium term make the Telstra Corp. (TLS) investment decision a no-brainer.
Telecommunications analysts and industry participants have questioned both the timing and size of a selldown of the government's remaining 50.1% stake in Telstra. And even if the government can win political support, at best there will be a perceived overhang of stock, damping medium-term demand and hence upside potential in the share price, analysts say.
Telstra, Australia's largest telco, was partially privatized in 1996, when the government sold a 33.3% stake in the company, and was sold further into public hands in 1999, when the government offloaded an additional 16.6% stake.
Prime Minister John Howard's Liberal National coalition government has foreshadowed another selldown of Telstra in the 2003-2004 budget year starting July 2003.
At current prices, its remaining stake is worth about A$35 billion.
Telstra shares ended Friday down 6 cents, or 1.1%, at A$5.43.
In the lead-up to the general election in November, Treasurer Peter Costello said the government intends to sell its stake in three equal parts, suggesting the next tranche - known locally as T3 - will be 16.7% of Telstra.
However, since the Howard administration won its third term, telecom analysts and industry participants have questioned both the timing and size of the issue.
A Dow Jones Newswires survey of nine senior telecom analysts found that the majority expect the government will gear up for T3 this year and push it through in the first or second quarter of next year.
The analysts were coy on predicting the potential size of T3 given the woes in the global economy, but many think the government may try to sell half of its stake rather than the third suggested by Costello, if economic conditions allow.
Apart from the economy, another potential hurdle will be competition from other telcos in the Asia-Pacific region also making share placements, estimated by Deutsche Bank analysts to top US$25 billion over the next couple of years.
"The government would like to sell its stake in two tranches, but (even) sending one quarter of Telstra to market could ruin demand for the listed shares," noted one senior analyst involved with the first two Telstra issues, who declined to be named.
"Costello wants to sell as soon as possible - that's what Telstra is being told - but the sale needs to get the approval of the Senate first," he added.
Shares Expected To Tread Water Until Earnings Report
The coalition government, which has 35 of the 76 seats in the senate, needs the support of the opposition Australian Labor Party, which has 28 seats, or the Australian Democrats who have 8 senators.
Both parties are against a further privatization that would wrest control of Telstra from the government, mainly because they believe Telstra should be government-controlled to ensure service quality, especially in regional areas.
Alternatively, support from any four of the remaining three independent senators and two Green Party senators would take Howard's government over the line, which analysts think is a more likely proposition in the current political climate.
Even if the government can win the necessary political support, at best there will be a perceived overhang of stock for the next 12 months, damping mid-term demand and hence upside potential in the share price, analysts say.
Institutions will get on board T3 at a reasonable discount to market price - local brokers want 8% to 11% - but retail investors will be wary as the company's second installment of shares are still more than 25% below current traded levels.
The second installment of Telstra shares cost investors A$7.40 apiece, but that was back in the days before the technology sector crash in April 2000. The shares have traded recently around A$5.50, in a range between A$5.39 and A$5.61 so far this year.
Most likely the shares will tread water until March 6, when Chief Executive Ziggy Switkowski announces the company's half-year earnings to Dec. 31.
Switkowski warned in November that Telstra's revenue growth will likely be flat until the end of the March quarter, prompting analysts to pencil in just 5% growth in earnings before interest and tax in the fiscal first half of 2001-2002 from the same period a year ago.
Analysts' 12-Mo Price Targets A$5-A$6 A Share
Local analysts will be focusing on forward-looking statements about the health of the industry and, more specifically, on earnings contributions from Telstra's Asian joint ventures.
Telstra has a two-pronged strategy to expand in Asia through its joint venture companies with Hong Kong's Pacific Century CyberWorks Ltd. (PCW), which were formalized in February.
The two companies equally control Reach, an Internet infrastructure company, while Telstra has a 60% stake in their Regional Wireless Co. venture. PCCW has a 40% stake in Regional Wireless, which holds the mobile assets of Hong Kong Telecom.
Analysts' 12-month price targets for Telstra generally lie between A$5 and A$6. ABN AMRO and Merrill Lynch are toward the low end of the range, while estimates by Deutsche Bank, Salomon Smith Barney and BNP Paribas are at the higher end.
The telecom team at Merrill Lynch has considered several hypothetical scenarios on a discounted cash flow, or DCF, basis.
They value Telstra at A$6.38 a share on the DCF upside and at A$3.73 a share on the downside. Their spot DCF valuation is A$5.62, while the long-term DCF valuation is A$5.15.
Separately, the telecom team at ABN AMRO thinks Telstra should participate in T3 itself, which may solve potential demand problems.
Their idea is for Telstra to buy back some of the government's holding because its balance sheet could support "significantly higher" levels of debt, ABN AMRO analysts said in their 2002 preview for Telstra.
Previously, the government selected 14 banks and brokerage firms, both Australian and international, to join a selling syndicate for T2 headed by global coordinators - ABN AMRO Rothschild, Credit Suisse First Boston and local brokerage JB Were & Son.
Lead managers JB Were and Ord Minnett for the Australian tranche; ABN AMRO Rothschild and Warburg Dillon Read for the European tranche; JB Were and ABN AMRO Rothschild for Asia-rest of the world; and Credit Suisse First Boston and Salomon Smith Barney for the North American tranche.
-By Graham Morgan, Dow Jones Newswires;
61-2-8235-2962; graham.morgan@dowjones.com
(Corrected 0241GMT)
Telstra, Australia's largest telco, was partially privatized in 1996, when the government sold a 33.3% stake in the company, and was sold further into public hands in 1999, when the government offloaded an additional 16.6% stake.
(Percentage figures on sale of Telstra stake by the Australian government were misstated, in Asian Stock Focus item that ran at 0009 GMT.)
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Updated February 3, 2002 9:41 p.m. EST
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