Telstra Corporation

n Weakness in the TLS share price reflects markets concerns about the sustainability and quality of future earnings growth given increased competition in its traditional areas of business and rise in non-labour costs. The recently announced alliance with Pacific Century Cyberworks (PCCW) is also concerning the market. In the medium term we are of the view that the PCCW alliance will add value to shareholders.

n TLS is committed to achieving significant permanent cost savings during FY01 & FY02 of $550m and $650m respectively. This goes part of the way to addressing the slowdown in forecast revenue growth to 7-8%pa.

n FY01 earnings of $4.2b (eps of 32.4 cents) are forecast including the contribution from the PCCW/Telstra joint assets. TLS shares are forecast to remain volatile until the final instalment on the TLS receipts have been paid by 2 November 2000. We recommend purchase of TLS during this period.