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Daily ShareChat: Telstra

By Jenny Ruth

Tuesday 24th August 2010

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 Jenny Ruth

Telstra Corp's guidance for earnings in the year ended June 2011 has unsettled investors, says Peter Warnes, an analyst at Aegis Equities Research.

Telstra, which also operates in New Zealand and whose shares are traded on NZX, said it expects a "high single digit percentage" decline in earnings before interest, tax, depreciation and amortisation (EBITDA) on "flattish" sales.

Its free cash flow guidance is between A$4.5 billion (NZ$5.69 billion) and A$5 billion compared with $6.2 billion in the year just gone.

"This brings the maintenance of the 28 cents annual dividend into question," Warnes says. A 28 cent dividend would cost the company A$3.48 billion.

Because the board won't like cutting the dividend, the prospect of an improvement in 2012 may see it maintain the dividend but there may be an issue on franking, he says. Franking credits will be negative A$138 million at June 30, 2011.

"2011 is a 'transition' year which will require additional investment to compete in a rapidly changing and challenging environment," Warnes says. The transition spend is aimed at consumer growth both by acquisition and retention.

"The benefits are expected to be delivered in 2012 and beyond," he says. "Chief executive David Thodey is determined to lift mobile market share at the expense of Optus."

Recommendation: Buy.


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