Brokers Hanging Up On Telstra

Sydney Morning Herald

Tuesday November 26, 2002

Edited by Jan Eakin

Analysts have been quick to ring in downgrades now that T3 has been shelved.

The sale of T3 looks like it's off for now and, surprise, surprise, all the brokers are downgrading.

JB Were took the lead last week when it moved its recommendation on Telstra to ``short-term underperform" on concerns about the drought and increased competition in the mobile market. ABN Amro followed suit, moving from ``add" to ``hold" and bringing its price target down from $5.50 to $4.80.

Now, Salomon Smith Barney has downgraded, cutting its net profit forecasts for fiscal 2004 by 12 per cent and also calling the stock an ``underperform".

The team at Salomon blame the downgrade on intensifying competition in the mobile phone industry and Telstra's reinstatement of subsidies at the lower end of the market.

As the cost of calls on mobiles fall, the theory goes, more people will switch away from using their land lines for local, long distance and international calls.

Another issue is anecdotal evidence that the market for information technology and telecom (IT&T) services is getting worse rather than improving.

Salomon also complained about the lack of visibility on cost-cutting initiatives and made a few assumptions of its own. The broker expects the headcount to be down by 5 per cent in 2003 and another 5 per cent by 2004 that's less than the team originally forecast.

The shares dropped 3c to $4.44 yesterday their lowest level for four years.

Rio facing challenges

Rio Tinto's management team made a presentation to investors last week but the feedback from analysts has been mixed.

Challenger First Pacific, which takes its research from Credit Suisse First Boston, said the focus was on China and its key role in iron ore production. The country's growth rate for iron ore imports is about 8 per cent a year and expected to grow. Challenger believes investors haven't fully embraced the story with money flows going to other names in the past year. That's a situation the broker believes is about to change.

Salomon Smith Barney doesn't sound quite so sure though. While China is a bright spot, the broker believes 2003 will prove another challenging year with weak global demand driving low commodity prices and the potential threat of a stronger dollar offsetting organic initiatives. Rio is in Salomon's long-term portfolio and has a share price valuation of $32, but it thinks the market has ``got ahead of itself" with fiscal 2003 earnings estimates looking unachievable. Market consensus is at $US1.7 billion ($3 billion) in earnings after tax, while SSB is $1.47 billion.

Rio shares closed 8c higher at $33.90 yesterday.

InterOil's PNG push

InterOil is not a company that attracts a lot of column centimetres, but the wannabe oil refiner looks like it may have an eventful few weeks ahead.

Chairman, chief executive and major shareholder Phil Mulacek is a key speaker at next week's seventh PNG mining and petroleum investment conference. Another key speaker is PNG Prime Minister Sir Michael Somare who, it is hoped, will give InterOil's plans in PNG a big lift by announcing some major tax changes.

As it stands, PNG's ``additional profits tax" means the PNG Government takes a big whack of profits once returns on a project pass around 20 per cent but this could all be about to change. InterOil is already building a 32,500-barrels-a-day oil refinery that will feed the country's needs (for diesel primarily) and leave some refined product for export, and also exploring around the area as the country's second largest holder of exploration acreage.

The basic problem is that it is difficult to justify oilfield development in PNG because of the costs relative to other markets, but the PNG Government is hoping to make the country an attractive place to invest again. InterOil, which is also listed on the Toronto Stock Exchange, closed steady at $1, down from $1.25 in June.

Booming biotechs

It's hard to believe money can be made in the current market, but brave biotech investors who invested in Ventracor, OMI or Sirtex in the past few months would have made a tidy packet.

Ventracor, which makes artificial hearts, has submitted an application to the ethics committee of The Alfred hospital in Melbourne to commence human trials of its artificial heart device, VentrAssist. If the ethics committee gives the OK, 10 people will be implanted with the artificial heart in the near future. The stock only managed a 1c rise to 89c yesterday, but since August 21 has risen 39c.

That's good, but not as good as Occupational & Medical Innovations which has rocketed $3.68 to $4.59 since June 26.

At the company's annual meeting in Queensland yesterday, shareholders were told OMI was ``confidently moving forward" with its plans to break into the US and European market.

Meanwhile, Sirtex shares have risen $2.44 to $4.39 this year. At the AGM last week, the company reviewed its successes over the past 12 months, which include receiving US regulatory approval for its liver cancer treatment, SIR-Spheres, and establishing 10 treatment clinics in US hospitals.