Five bucks here we come? Any advance on five bucks?
Telstra’s share price kicked higher towards that $5 mark yesterday in the wake of the first half earnings statement, showing a better than expected drop in profit.
The shares rose 17c yesterday to $4.54.
That’s the highest level for more than a year and was last recorded around early December, 2005.
The instalment receipts also hit a new high of $3.12 during the day (Did the Howard Government sell too cheaply because they were outsmarted by some clever institutions?) They closed at $3.11, up 18c
Whatever, those smaller investors who took them up and held are doing very well (a return approaching 60 per cent). Those who stagged them early only have themselves to blame.
But TLS rebounded because the market has accepted the line from CEO Sol Trujillo that things aregoing to get better from now on, after getting worse, as the company and management predicted last year.
So when management and the company confided yesterday that a significant turnaround in earnings performance in the second half is now expected, with the costs of its ‘transformation strategy’ now behind it, investors said; ‘yep, we believe you’.
This was despite Telstra’s overall profit margin, (It’s measured by earnings before interest, tax, depreciation and amortization margin as a percentage of sales,) falling to 42.3 per cent from 46.3 per cent a year earlier.
That normally would have had punters and analysts rushing for the exit and crying ‘the sky is falling’
Of course it does help that the anticipated 14c a share interim dividend will be paid, matching last year’s payment after excluding that 6-cent special dividend in 2006.
And now, suddenly, instead of doubt being cast on the possibility of the 28c a share annual dividend not being paid past 2007 financial year, Sol and the board now see a reduced chance of dividends being cut in future years because the company’s cash flow was on the improve.
Which is good news but went some way to offsetting the impact of the downturn in earnings and emphasising the upside from now on.
TLS said first half net profit fell 20 per cent to $1.7 billion from $2.14 billion in the first half of 2006 and that was a little better than what Sol and the board said would be the outcome many times last year, so the reaction was muted.
Telstra now expects full year EBIT growth of 3 to 5 per cent, which is better than previous guidance of 2 to 4 per cent.
Which Sol said in turn means ”We expect that second half EBIT will grow by between 37 and 40 per cent.”
“We are only 13 months into our five year transformation,” Mr Trujillo said.
“However, with 47 months to go, we have reached the pivot point, with positive earnings growth to recommence in the second half. We are on or ahead of our transformation plan on all fronts.
“Our financial performance is ahead of guidance. We are winning where it matters – in 3G, broadband and digital online offerings. We have slowed the PSTN decline.
The company said its operating expenses rose nearly 10 per cent to $6.88 billion for the first half with cash operating capital expenditure up 23 per cent to $2.5 billion.
Fixed-line sales fell 5.6 per cent to $3.62 billion as customers cancelled 170,000 phone lines.
And that again, coupled with the 10 per cent rise in costs would have got the analysts clucking madly last year and the share price diving lower.
How different things are after TLS has been freed from Canberra’s control.
But that can’t account for all the remarkable change in sentiment.
What will happen if Sol and the company should stumble and miss forecasts?
