Cath Hart | August 15, 2008
TELSTRA'S increased 2010 capital expenditure forecast from 10-12 per cent to "about 14 per cent" has emerged as the fly in the ointment of the telco's sterling full-year result, analysts said yesterday.
The telco posted a $3.7 billion profit at its annual results on Wednesday, raised long-term guidance and signalled a higher capex spend to deal with increased customer demand and to finalise its five-year transformation plan.Goldman Sachs JB Were analysts Christian Guerra and Raymond Tong added the stock to the bank's "conviction list", saying it was the No1 pick in the communications, media and entertainment sectors.
The elevation came despite Telstra failing to migrate 5 million customers to a new billing platform by July, which saw IT costs surge to $568 million.
So far, only 3.3 million customers have been migrated to the new billing system.
The analysts said they were "more comfortable" that Telstra's IT transformation was on track following the result, particularly after the upgrades to its 2010 guidance.
"(These) imply the financial outcomes -- ie, cost savings -- from the IT transformation remain on track," they said.
The analysts said the higher 2010 capex forecast was "the one negative" in the result and that it "confirmed the cost of growth".
"Clearly, higher sales growth is driving higher capex requirements," they said.
"The upgrade is a salient reminder of the age-old telecoms equation: growth in network volumes (means) capacity investment required.
"In Telstra's case it is comforting to see the company converting the strong data volumes into robust sales growth."
Despite concerns about the upgrade for the 2010 capital spend, Telstra has now passed the peak for transformation-related outlay, reducing capex by 9.7 per cent to $5.4 billion in 2008 from $5.9 billion in 2007.
Merrill Lynch telco analysts Stephen Myers and David Kaynes maintained their buy recommendation on the stock.
"The transformation spend may be indicative of some overspend/delay in the transformation program, while the increase in the 'business as usual' capex is indicative of the aggressive capex/sales expectations management had set," they said.
Citi analyst Tim Smeallie maintained his hold rating on the stock "due to choppy market conditions and regulatory risks still on the horizon", particularly associated with the federal Government's national broadband plan.
"We maintain our non-consensus view that regulatory risk remains extremely high, and struggle to identify an outcome that is value accretive for investors," they said. Telstra shares fell 6c to close at $4.26 yesterday