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Stock of the week

Provided by Aspect Huntley

Telstra Corporation Limited (TLS)

Recommendations

Buy

Investment ratings

TLS is the leading telecommunications and information service provider in Australia with a full suite of services across voice, mobile, data and internet products and has either a dominant or significant market share in each service category. TLS also offers services including directories, advertising and Pay TV. It operates in a highly regulated industry where the extent of regulation penalises it due to its market position and historic ownership. The Strategic Review of November 2005 outlined a wide-sweeping transformation of TLS from the complex to the simple - from price-based to value-based competition with broadband anchoring the future direction. TLS is on track to deliver significant free cash flow in FY10.

Recent Analysis

The longer negotiations with the government and NBN continue the greater will be the impact on revenue and earnings. Top line management is being distracted from the pressing issues involving three key operations - PSTN, Mobile and Sensis. In all three key areas revenue is under significant pressure making the achievement of margin guidance increasingly difficult. At present Telstra is seen as an easy target by competitors and they are collectively making inroads into market share. The accelerating decline in PSTN revenue caused TLS to miss both 1H10 revenue and earnings guidance and the downgrade to FY10 revenue guidance from low single digit growth to a low single digit decline. Mobiles, which was the largest single contributor to 1H10 group sales revenue, with $3.62bn representing almost 30% is also under pressure. Clearly TLS continues underperform in smartphones as Optus and Vodafone capture share by linking with the successful iPhone handset. Sensis revenue is also being pressured. Yellow ? revenue, which represented 57% of total Sensis advertising and directories revenue in 1H10, fell 4.4% and the downward trend is accelerating at least in part to Google aggression.

Previous close	52 week high	52 week low
$3.17	$3.71	$2.88
Sector
Telecommunication Services
Market cap
$39,445 Million

Total shareholder return (avg annual rate)
1yr	3yr	5yr	10yr
7.8%	-5.2%	-1.6%	-2.4%

Earnings and dividends forecast (cents per share)
	2010	2011	2012
EPS (c)	32.9	31.4	32.2
PE Ratio (x)	9.6	10.1	9.9
DPS (c)	28.0	28.4	28.9
Div Yield (%)	8.8	9.0	9.1

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