$100m Mobile Static

Sydney Morning Herald

Tuesday August 15, 2000

Mark Todd

Brokers weigh up the risks for Telstra in Hong Kong play. Mark Todd reports.

Telstra's $6.5 billion deal with Hong Kong entrepreneur Mr Richard Li and his Internet group Pacific Century CyberWorks looks like one of those no pain, no gain transactions.

Deutsche Bank calculates in a recent report that the transaction could dilute Telstra's earnings by 3.2 per cent in the short term, before boosting the bottom line by 5 to 10 per cent in ``outer years".

In Deutsche's worst-case scenario, the CyberWorks deal could cost Telstra more than $100 million in lost earnings based on an expected annual net profit of $3.8 billion, to be issued at the end of the month.

Deutsche, which rates Telstra a buy and has a 12-month price target of $8.50, pinpointed the Telstra-CyberWorks mobile joint venture as the market's most pressing concern. The deal was struck in April near the top of the market as far as valuations for mobile telephone businesses go.

The bank believes Telstra and CyberWorks could struggle to attract mobile operators to their pan-Asian mobile joint venture because NTT DoCoMo of Japan and Hutchison Whampoa of Hong Kong are aggressively forming their own global mobile groupings.

CyberWorks is due to wrap up its $US25 billion ($43 billion) takeover of Hong Kong incumbent telephone carrier Cable & Wireless HKT later this week.

Index unison

With interest rates expected to rise again before the end of the year and the economy likely to slow as a result, the sharemarket doesn't have that much room left to move. Strategists on average have the All Ords pegged for a year-end close of 3350, only 2.3 per cent up on yesterday's finish of 3275.90.

Commonwealth Research is looking for a marginally lower finish for the All Ords at 3325. Still, a close around that mark would represent a capital gain of 7 per cent for 2000 or 10.5 per cent if you include dividends. That is in line with long-term trends.

Commonwealth Research calculates industrial companies are trading on a price-earnings multiple of 17 times 2001 earnings, which isn't excessive so there is a bit of room to move. Not surprisingly, banks, property trusts, and large industrial stocks are emerging as the targets in the current interest-rate dominated environment.

At the same time, corporate activity, rising commodity prices, and a weak exchange rate are supporting the resources sector.

As the graph shows, the resources companies have been clear underperformers in the past two years but are now enjoying forecast earnings growth of something like 100 per cent over the next 12 months.

This gives rise to the unusual scenario of the All Industrials, All Ords, and All Resources indexes being poised to move in roughly the same direction.

Bouncing back

Software firm Ci Technologies's shares have moved back into something approaching favour in the past few week after hitting a 12-month low of $4.20 in June.

The stock hit trouble when the company flagged slow revenue growth and a 30 per cent slump in earnings for the June half.

The share price fell 16c yesterday to finish at $6.08, holding the $6 level it only recently recovered after those dark days in June. The optimism stems from an increasing flow of news, and hopes of more to come.

Last week's disclosure of a $2 million contract with ANR Pipeline of the US to install its automation software ended a bit of a good news drought. Earlier in the week Ci Technologies announced a tie-up with a new UK distributor, Automation Products, closing out its major competitor, Intellution.

``Of all the European markets, the UK was the sleeper. This new distributor will put them on the map," said Macquarie Equities analyst Alex Milton.

Others, however, are adopting a wait-and-see approach, preferring to err on the side of caution in view of concerns that the global environment for technology shares may remain flat for the time being.

Rush for float

The burst of goodwill towards the health care and biotechnology sector hasn't evaporated just yet judging by the interest in cancer treatment concern Sirtex Medical.

Underwriter KTM Capital found itself in the rather good position of having to trim back allocations of shares in Sirtex after strong demand from the big end of town.

Most of the $15 million offer went to institutions. About 28 per cent of Sirtex now rests in public hands, joining founder and director Dr Bruce Gray with 36 per cent and venture capitalist Nomura JAFCO with 22 per cent.

The company, all of which is worth $54 million at the $1 a share issue price, is scheduled to list on the ASX on August 24.

Riding high

FH Faulding & Co shares ended last week at a six-month high but from here any further gains will hinge on the outcome of litigation over its epilepsy drug, gabapentin.

Rival Warner-Lambert has alleged patent infringement. If Fauldings is successful in fending off the claim, it plans to release the drug mid-next year.

Last week Faulding shares rose 15 per cent on US court approval of the company's generic drug to treat osteoarthritis. According to one analyst, the outstanding Warner-Lambert litigation is ``a definite swing factor as far as the share price is concerned."

Faulding shares eased 25c to finish at $9.55.

Tops with traders

Aurora Gold is rapidly become a darling of the day traders.

The latest betting plunge on the stock came amidst indications from diamond giant De Beers yesterday that it had no great attachment to its 34 per cent stake.

De Beers said in documents for its $522 million tilt at Ashton the Aurora stake was ``not consistent" with its core business.

That triggered a 3.5c rise in Aurora shares to 24c with more than 5 per cent of the company traded, the heaviest turnover in the stock for several months.

Most of the dealing was handled by ComSec and E*Trade, brokers typically used by so-called day traders betting that Aurora, with a big block of shares potentially on the market, will now come into play as a takeover target itself.

Aurora's share price was stagnating at less than 20c before De Beers launched its bid for Ashton just over a week ago.

Takeover potential aside, analysts also note that the company is a cheap play on the gold price.

This is particularly so now that the worst seems to have passed at its Mt Muro goldmine in Indonesia. Not that the day traders will take take much notice.

SPOTLIGHT ON RESOURCES SECTOR

* Rising interst rates are a negative for the sharemarket

* Portfolios are shifting towards safe haven sectors

* Corporate activity is driving the mining sector