Telstra could beat $6

Published in The Courier Mail, April 2007

Erica Thompson

Telstra could beat $6 early next year
The shares are up more than 30 per cent since November
T3 instlaments have jumped more than 30 per cent

TELSTRA shares are stunning the market with some analysts now tipping the stock to power through $6 as early as next year as investors pile money into the stock.

But others say the share price is getting dangerously ahead of itself as investors become complacent about the competitive risks to the telco.

Both ordinary Telstra shares and the T3 instalment receipts surged 16 yesterday to $4.85 and $3.39 respectively.

Since the T3 float in November, the ordinary shares have risen more than 30 per cent and the instalment receipts more than 50 per cent.

The shares slipped back slightly today and Telstra was quoted at $4.80 at 2.48pm and the T3 receipts at $3.34.

Positive news for Telstra
But analysts are divided over the source of the upswing.

Southern Cross Equities director Charlie Aitken said the fact Telstra was no longer a "political football" had helped improve sentiment.

"There is a big correlation between the share price and the lack of reporting of Telstra developments (since it was privatised)," he said.

"But I don't think anything's drastically changed. Really, all you're seeing is an unwinding of grossly pessimistic expectations to more realistic expectations."

Greg Canavan from Fat Prophets said unlike this time last year, the news flow has been nearly all positive for Telstra.

"The broadband issue appears to be favouring Telstra . . . (and) investors are starting to acknowledge that Sol Trujillo and the management team are successfully executing the transformation plan," he said.

Mr Aitken believes ordinary Telstra shares will be trading at $6 within two years. "It's not a big call. It's only $1.30 higher," he said.

Buyers need to be cautious
Wealth Within chief investment analyst Dale Gillham is also predicting the stock to pass $6 possibly by mid-2008, but remains sceptical about what's really driving it upward.

Steve Johnson from The Intelligent Investor also believes investors should tread carefully.

"There's a lot of interest in strong cash-flow businesses like Telstra at the moment and, as we've seen with Qantas, nothing's off limits in the private equity world," he said.

Other brokers say the telco is too expensive compared to its global peers. JP Morgan said Telstra shares were 10-15 per cent overvalued, saying the current valuation "would imply earnings growth of 15 per cent in FY08, which we view as virtually impossible given the various initiatives that will hit Telstra's earnings that same year".

But Mr Aitken said shareholders shouldn't panic. "Telstra is all about the dividend yield and the dividend yield outlook is increasingly positive," he said. "You can buy them now and be pretty much assured that the dividend will be 28 or more for the next three years."