13/09/2005 - 22:00

Tim Treadgold: Briefcase -Brokers see through Telstra games

13/09/2005 - 22:00

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A funny thing happened on the stock market last week at the height of the confusion about the sale (or not) of the Government’s outstanding 51 per cent stake in Telstra. Rather than run in fear, most stockbrokers remained optimistic about the investment fundamentals of the company.

Of the 15 top-flight stockbroking firms, which closely follow Telstra, 13 retained buy or hold tips. Only two said sell.

There are a number of reasons for this apparently contradictory stance, given the political furore surrounding Telstra.

It is possible that the 13 who said buy/hold believed the price had dropped so low that it couldn’t fall much further.

But – and this is the theory Briefcase likes – the brokers were looking through the political smokescreen and seeing the antics in Canberra as nothing more than a great game.

To understand one part of this argument, look first at the astonishing relationship between management and the major shareholder. Unlike any company Briefcase has ever seen before we have the two key players on opposite sides. In simple terms, management is a buyer of Telstra. The major shareholder is a seller. Talk about a lack of alignment between the interests of the major parties.

Looked at another way, and this makes the battle between Telstra management and the Government even easier to understand, the Government wants the share price to rise, management is quite content to see it fall.

The reason management has this negative view is that it is being led by a new team (Sol Trujillo and his American friends) who would like to drive the price down to what they believe is a realistic level so they can emerge as heroes once the Government is off the share register.

Another part of the game is to look through the nonsense argument of those who want to keep Telstra under government control.

Leaving aside political allegiance for a second, consider one of the key planks of last week’s case of the ‘don’t sell’ brigade – that 14 per cent of Telstra phone lines had faults.

In the excitement of saying ‘isn’t that an awfully high percentage’ it seems to have been forgotten that this 14 per cent fault rate was achieved while Telstra was under government control.

Understand this point and then ask the question that, if it occurred while the government controlled the business, why would it suddenly get any better if Telstra remains under government control?

Since when has government been any good at running anything?

For proof of this jaundiced view consider how well governments run hospitals (disastrously), schools (failed), water supply (sorry, we can’t keep up), electricity (oops, was that another brown out), railways (just a small cost overrun), and on, and on, and on.

Briefcase reckons that the political games enveloping Telstra have a bit further to run, especially with Barnaby ‘can’t make up my mind’ Joyce saying he’s having second thoughts about the sale.

But once the politics have been played out, and Mr Trujillo has driven the price down to a level he believes is realistic, business can begin.

For starters, and given all the publicity about what a bad financial performer it has been, Mr Trujillo will swing an axe through Telstra’s bloated workforce – reducing it to the conventional levels of every other phone company and broadband service provider.

In time, the job cuts may be seen as the ultimate irony for those who opposed the government sale, and used as part of their attack criticism of Telstra’s financial performance and dividend pay-out policy using reserves.

Once again, this is an example of how the business was run under government control – setting the scene beautifully for a wholesale makeover, and massive job losses.

The market, as ever, is looking beyond the short-term and petty politicking. The 13 brokers who are holding their ground on Telstra as an investment can see how the game is being played, and how the fundamentals of the business remain intact, even if facing stiff competition.

•••

Gold has never been a favoured investment of Briefcase but there is a set of conditions emerging that might change that view.

First, there is the state of the US economy and, by inference, the value of the US dollar. In the aftermath of Hurricane Katrina, and the dent this has put in US optimism, it seems likely that the long-predicted fall in the dollar might now take place – it is certainly in the interests of the US Government to let this happen.

Second, there is evidence that physical demand for gold remains strong, as shown in the latest World Gold Council statistics, which point to a sixth successive quarter of rising jewellery sales.

Third, there is the oil argument – a factor that needs a little explaining. Gold, like oil, is a commodity that has reached peak production. In other words, we’re using more of it than we’re producing, or finding.

It took a few years for the penny to drop with oil, but once it did the price went through the ceiling. The case with gold is similar. Consumption has been exceeding production for years with the shortfall met by central bank selling, and ‘dishording’ by investors who were gloomy about the outlook for gold.

It is possible that the gold worm has turned, though care should be taken when making an investment decision because two issues could yet effect this positive outlook. First, a slump in the US dollar probably indicates a worldwide slowdown, and a rise in the gold price could flush out more central bank sales.

On balance, gold does appear to be heading into interesting times and a price of $US500 an ounce might not be out of reach.

•••

In case you thought Briefcase would let you off with a dash of good news with those optimistic observations about the gold price, take a look at a few other metals and think about their local impact.

Nickel and manganese are on the way down, says the big French producer Eramet. Why? Because Chinese buyers are holding off buying ahead of the start of new mines.

In other words the steel mills, which account for most of the demand for nickel and manganese, are running down their high-priced stockpiles and waiting for new material to arrive.

Little wonder that Noble Resources dumped half its stake in Consolidated Minerals, and the share prices of most nickel miners are looking a little weaker.

•••

“When we ask for advice, we usually look for an accomplice.” Marquis de La Grange.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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