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SYDNEY - Telstra Corporation is expected to do better than its guidance when it reveals its annual profit results this week, as Australia's biggest telecommunications company increases revenue from its Next G mobile services.
But analysts say investors will focus on Telstra's outlook for the next two years and particularly the progress of its "transformation" and the associated cost savings, when the company releases its 2007/08 results tomorrow.
Telstra's chief executive, Sol Trujillo, is about halfway through a five-year transformation programme that involves transferring customers to new computer systems, improving services, updating internal networks and cutting about one-fifth of the work force.
He is aiming for 2.5 per cent to 3 per cent revenue growth a year to 2010, and said in May that the transformation was on track.
Telstra also confirmed in May that fiscal 2008 earnings before interest and tax (ebit) will grow between 6 per cent and 8 per cent, or equivalent to as much as A$6.24 billion ($7.9 billion).
"These results are going to be less about 2008 and more about 2009 and 2010," ABN Amro Equities analyst Ian Martin said. "We will see how the timetable of the IT transformation is going and how many customers have been moved on to the new system. Telstra is trying to become leaner."
Martin is forecasting Telstra's 2008 ebit to grow 7.6 per cent to A$6.23 billion, towards the upper end of the company's guidance, and is estimating ebit to increase 10 per cent in 2009.
The consensus ebit forecast is much higher, around the 10.2 per cent growth forecast by Macquarie Research Equities' analysts Andrew Levy and John Woods.
Goldman Sachs JBWere analyst Christian Guerra is estimating ebit of A$6.32 billion, equivalent to a 9.4 per cent increase from the A$5.78 billion reported by Melbourne-based Telstra last year.
"The major driver of top-line growth continues to be wireless data and the mobiles division," said Levy in a note to clients.
Levy is expecting the share price to react to Telstra's guidance for 2009 and updates on the IT transformation and management objectives for 2010.
Shares in Telstra ended at A$4.54 on Friday, up A4c. The stock has declined by 5.3 per cent so far this year.
ABN Amro's Martin has a 12 month share price target of A$5.28 and rates the company a "buy" because of the double-digit earnings growth he's forecasting for fiscal 2009.
Levy has a 12-month target of A$4.90 and rates Telstra an "outperform" while Goldman's Guerra had a one-year target of A$5.41 as of June and also rates it a "buy".
Another factor to watch was the erosion of Telstra's revenue from its fixed line, or PSTN, business as rivals provide services through unbundled local loops (ULL), which allow them to avoid reselling Telstra's wholesale product, Martin said.
Levy said PSTN revenue will continue to decline as people increase mobile use over fixed-line phones and migrate to other providers who use ULL services.
Telstra was likely to pay a final dividend of 14 cents, equal to the interim payment rather than an increase because of the difficult credit markets, the potential investment in the national broadband network and because the benefits from the transformation hadn't come through, Levy said.
The company's fiscal 2008 first-half net profit increased by 13 per cent to A$1.9 billion as ebit grew by 6.2 per cent to A$3.12 billion.
On the transformation, Trujillo had set himself an ambitious timeframe for a huge task which would involve changes in every aspect of the company, according to independent telecommunications analyst Paul Budde.
"There might be a delay," Budde said.
"I don't mind, but the market will punish Telstra for a delay."
- AAP
