true or false: telstra is a buy

True Or False: Telstra Is A Buy
FN Arena News - September 13 2006

By Rudi Filapek-Vandyck

We reckon being the telco analyst at one of the major stock brokerages in the country is a lose-lose position, offering no merit and no glory nowadays. With the government, Telstra and three brokers having started the international road show to offload T3, any change in view is bound to be viewed with a lot of suspicion.

Imagine what would happen if Macquarie changed its Neutral view on Telstra tomorrow. No doubt if the recommendation went up whispers would go around about how the Millionaires Factory tries to smarm its way into the Telstra sale banking consortium. If it turned out to be a Sell the general ordeal would be: jealousy!

Obviously, the same thematic applies to Deutsche Bank. Together with the likes of JP Morgan, Credit Suisse and Morgan Stanley, the bank is in the running for the remaining one or two spots of associate joint global co-ordinators for the $8bn sale of shares in Australia's largest telco.

This now makes its reviews on Telstra by default suspicious (sorry even Chinese Walls are impregnable in our view).

A few things have changed between the last update on Telstra by Deutsche Bank this week and the previous report, issued a little over a month ago. For starters, Telstra shares were still trading at $3.80 back then, versus $3.50-something nowadays. But probably the main difference is that back then (a month ago) Deutsche Bank had analyst Richard Long, CFA on the case and Long has since been replaced with Sameer Chopra, reportedly working for Accenture previously.

With the new analyst also came a fresh approach. In his maiden report on the telco, Chopra wipes away the rather sombre assumptions of his predecessor, opting for a much sunnier outlook in terms of larger broadband penetration, slower fixed line erosion, lower capx spend, less depreciation,… the list of changes is quite a long one. (Chopra even assumes higher dividend payouts by putting 28c in his model for the next four years).

In the end, all this leads to a considerably more attractive investment opportunity and it is thus no wonder that the new analyst's maiden report contains a recommendation upgrade to Buy (was Hold) and an increase in the telco's twelve month price target by 10c to $4.00.

We don't know why Long is no longer and Chopra is, but we do remember the last time one of the Deutsche Bank analysts ran into trouble with management about his refusal to change his negative investment view: it was Mike Mangan, the company was Rupert Murdoch's News Corp and he (Mangan) was promptly replaced by two colleagues in New York. And oh yes, the first report from New York carried a Buy as opposed to Mangan's persistent Sell.

This seems a bit unfair as Mangan's version of what happened has always been denied by Deutsche Bank who claims Mangan had still been offered to move to the US but refused. What else could management do but sack him?

All we know is that Mangan's final report on News Corp made for very entertaining reading. Let's hope (for Deutsche) that Long doesn't show up in the press shortly revealing he too got the sack because of his "No Buy" opinion. Although we would be delighted having the opportunity to digest a Mangan-like story about the insider-machinations behind what should be Australia's largest share offering for the foreseeable future.

But we also reckon all this is merely wishful thinking.

For the record: post the recommendation upgrade by Deutsche, Telstra's reading on the FN Arena Sentiment Indicator is 0.1 (still meager at best) with only Credit Suisse (Outperform) and Aspect Huntley (Accumulate) rating the shares positively as well.

SB Citigroup and Merrill Lynch both rate the shares a Sell. Citigroup reiterated its view as recently as this week.

There have been no changes thus far regarding Telstra's investment rating at the three appointed global coordinators for the T3 sale - UBS, GSJB Were and ABN Amro (Morgans). Moreover, GSJB Were is the third leading local expert with a negative Underperform/LT Hold rating on the stock.

Question: does the fact that one of the global coordinators communicates a negative view on the shares to its own clientele prove that Deutsche Bank's change of heart can be genuine?

Or does this merely mean that GSJBW is about to change its view as well?

We would have liked to be there when GSJBW staff is answering questions from offshore investors about this.

Shame we haven't been invited to any of the meetings.