T3 leaves experts divided

Published in news.com.au, October 2006 by Erica Thompson

STILL undecided about whether to buy T3 shares? You are not alone.

With the retail offer for $8 billion worth of Telstra stock opening today, even the experts remain divided on whether to take a punt on the lumbering telco.

At $2 a share for the first instalment, bonus loyalty shares and a fully franked dividend yield of 14 per cent, the float is certainly attractive.

But what about those niggling management and regulation issues? The increased competition from new technology and the bitter memories of T2?

Unfortunately, there are no guarantees. But with 2 1/2 weeks until the offer closes, analysts advise wavering investors not to be afraid to put the offer to the test.

Managing director of independent tipsheet, The Intelligent Investor, Steve Johnson says T3, while not cheap, is one of the best value blue-chip shares around.

"Our recommendation is that people do subscribe,'' he says. "We're optimistic about the long-term prospects for Telstra.''

Their faith in the telco hinges on its "infrastructure stranglehold'' and ability to pull off its $11 billion transformation program, which includes the roll-out of its Next G wireless network.

"We think with their marketing power and their database of customers it could prove very profitable,'' Mr Johnson says.

However, he says T3 is not without its risks and will be recommending clients invest no more than 10 per cent of their portfolio in Telstra.

He also believes some people are being pushed into T3 for all the wrong reasons -- namely, the juicy dividend.  "Buying any share for a short-term dividend return is a very risky strategy because there are absolutely no guarantees to what will happen to the price of the shares that you own over that period,'' he says.

"We would say investing an absolute minimum of three years, but you should probably expect to be holding it for at least five.''

Wealth Within chief analyst Dale Gillham urges potential investors to look elsewhere, saying there are other companies that pay good dividends and, unlike Telstra, are rising in value.

"If the word Telstra was taken off that stock, would anybody want to own it? The answer to that would have to be absolutely not,'' he says. ``People are so emotionally tied to this stock, but to me, its just a business decision. You're either making money or losing money and people are losing money.''

Mr Gillham predicts T3 shares will fall below $3 in the next 12 months. "It's losing market share in lots of areas from internet to mobile phones and ask anybody if they get good service from Telstra and they'll say no. It takes a long time to change that perception.''

Centric Wealth head of equity research Paul Zwi says investors who were burned by Telstra in the past should not swear off the stock altogether, but Centric analysts will not be recommending T3 to clients.

"The important decision that investors have to make is where's the stock today and where's it going to go in the future,'' he says. "Is this the turning point for Telstra? It may well be, but we're not, on balance, ready to participate.''

Mr Zwi says while the T3 offer is very attractive for income-oriented investors, the risks and uncertainty outweigh the short-term opportunity.

"We're concerned Telstra's revenues and profit margins are under attack from a range of competitors and the regulator and so we see earnings growth as being somewhat limited,'' he says.

Analysts at Fat Prophets take a different view, arguing Telstra's management team have made significant inroads that, if sustained, could lead to long-term share price appreciation.
Mr Johnson agrees once the negative air clears, T3 could turn out to be a bargain.

"I think one of the big benefits people are overlooking is the fact that the Government won't be a significant shareholder anymore,'' he says. ``We've seen a lot of interference . . . and the interference continues with Geoff Cousins's appointment to the board but once they're gone, that will be good for shareholders.''