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from bloomberg Telstra Valuation Cut By Analysts, May Trim Government's Return

Nov. 16 (Bloomberg) -- Telstra Corp.'s valuation was cut by analysts at Citigroup and three other firms after Australia's largest telephone company reduced its earnings forecast, which may force the government to accept a lower price for its stake.

Citigroup analyst Tim Smeallie lowered his target price for Melbourne-based Telstra's stock by 14 percent to A$3.75 after Chief Executive Sol Trujillo yesterday said profit may fall 30 percent this year. Analysts at Macquarie Bank Ltd., Goldman Sachs JBWere and Merrill Lynch & Co. also lowered their valuations.

Trujillo forecast a profit drop that was triple Telstra's estimate in September because of spending on networks and costs to fire as much as 23 percent of its workforce. Telstra's stock fell after his statement, cutting the value of the government's 51.8 percent stake, which it wants to sell in 2006 for as much as A$5.25 a share, or A$33.8 billion ($25 billion).

``The government's target of A$5.25 a share is looking very, very optimistic,'' said Craig Young, who manages the equivalent of $1.2 billion at Tyndall Investment Management Ltd. in Sydney. ``There's a lot of bad news over the next year with increased costs, uncertainty over regulations and dividend cuts.''

Telstra's stock had its biggest fall in four years yesterday reducing the value of the government's stake to A$26 billion ($19 billion), less than its budgeted target.

Shares of Telstra rose 3 cents to A$4.05 at 2:46 p.m. in Sydney. They have declined 18 percent this year while the S&P ASX 200 Index gained 14 percent.

Payments Scrapped

Telstra said it would reduce its workforce by as many as 12,000 over five years and scrap a A$1.5 billion payout to investors next year as it spends money to unite its networks into a lower-cost Internet-based system and contends with increased rivalry.

U.S.-born Trujillo needs to cut costs as revenue declines at Telstra's fixed-line unit, which generated more than a third of last year's A$22.2 billion sales. Fixed-line sales may fall as much as 10 percent this year, the company said, as customers switch to cell phones, e-mail and Internet calling.

``We're taking a beating over what we're doing, but this will be a much stronger company going forward,'' Telstra's Chief Operating Officer Greg Winn told analysts and reporters in Sydney today.

Trujillo, who joined the Melbourne-based company July 1, said the changes will help spur sales through 2010 by 2 percent to 2.5 percent a year and the company's profit margin will widen to 52 percent from 48.6 percent last year. Some analysts and investors said his predictions may be too optimistic.

Long-Term Forecast

``While the longer term forecasts provided by Telstra are possible, the question for investors is, are they probable? We think not,'' Tim Smart, an analyst at Macquarie, wrote in a note to client.

Telstra's stock price will probably stay at current levels until the company starts to deliver on its promises, fund managers including Steven Marsh said.

``The plans from the company are quite ambitious and I think the risk is in the execution,'' said Marsh, who manages the equivalent of $403 million at Trust Co. of Australia in Sydney. ``If they're unable to deliver on these promises you might not see too much appreciation in the stock.''

Telstra has about 60 percent of Australia's A$35 billion telecommunications market. Its market share has fallen from 80 percent in 1997 amid increased competition from Singapore Telecommunications Ltd. and Vodafone Group Plc.

The government is scheduled to this month appoint investment banks to advise on the sale, which is likely to occur in late 2006. A single offering would make the share sale the world's second-biggest after Nippon Telegraph & Telephone Corp.'s 1987 offering.