Have you read the latest announcement? Earning downgrade by...

Have you read the latest announcement? Earning downgrade by about 55% for 2006 to 2.5m from 5.5m. May be more bad news to come. Latest RR newsletter (19/12/05) also said that OTL could go broke.

I cut & paste some parts of the RR report (between asterisks).
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At the 25c level, we thought it was worth being out of OTL but the stock just dropped like a stone last week as panic took over and many market players just exited… as we all know, this sort of panic very often (but not always) creates opportunities. Whether it has for OTL depends on how much further things will deteriorate, largely as a result of TLS’s changed behavior toward its wholesale customers. Not surprisingly, OTL continues to try to put a positive spin on it, suggesting that if things return to more normal levels, then operating earnings should improve materially by 2007.
From where we stand, it is hard to feel any degree of confidence that this will occur and we certainly would not like to be dependent upon the newly aggressive TLS. OTL has updated the market today with another profit downgrade and noted it is now in a negative cash position (yes, that means it has debt, not cash!) due to the outflows of paying a dividend, buying back shares, funding the legal costs of fighting TLS and so on. Could OTL go broke? Yes, it certainly could, and we suspect TLS would like to make damn sure it does!!
Given the state of flux in the telecommunications industry, OTL’s position as a pure price taker, and its absolute lack of a sustainable competitive position, we feel that buying or holding this stock is just pure gambling at this point. Of course, there is a possibility that OTL will see an improved operating environment with time and if it did, the share price would rebound.
We do not know whether sentiment may improve and give us an opportunity to exit at a higher price, but we do feel there remains a risk that OTL will head lower still, perhaps even go broke. Subscribers are advised to exit this stock with whatever capital they have left.
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Other negatives are:
* Negative cash at the moment, so highly unlikely for further buy backs. OTL may even borrow money or further capital issue (right/SPP/note) may take place.
* Asset back drop below 5c now at best assuming no debt (13.5c as at June 30 with 7.7 m cash , and 80 m shares give cash backing at 9.6c at that time. Now at 19/12/05, the negative cash, so the 9.6c cash backing is gone now. So the asset backing at best is 13.5c-9.6c= 3.9c)
* No half yearly (may be final) dividend likely due to short of cash.
* Need to show Telstra & court that corrective actions for Indian call centre have been done. Refer to ASX Announcement 25/11/05, result of Telstra Action upon OTL. TLS & OTL will meet again in Feb 2006.
* TLS is getting aggressive with wholesale & resellers and may increase line rental charge, wholesale charge in future. TLS is under pressure from ACCC and Government (Helen Coonan, Minister of Communication) on ITS ULL pricing policy, F2N, safe harbour, operation separation issues.

Positive news:
• Hunterhall (HLL) may support it (so the investment does not look bad) and HLL is investing for med/long term. Some people may argue that HLL may not want to throw good money after bad and after yesterday shocking downgrade.
• It could be a turn around story after the telemarketers in Indian call Centre have been educated to follow the new procedure.

As always, DYOR before buy/sell/hold

Cheers,
BL