Huntleys' Stock of the Week

Recommendations: Buy

TLS's current stock prices

Peacemaker in the NBN minefield

Investment Rating:

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. Yield and turnaround attraction.

Event:

• New CEO David Thodey and Chairman Catherine Livingstone are faced with a quandary of massive proportions.

• Firstly, do they reaffirm the forecasts of Sol Trujillo for FY10 or establish a new earnings and free cash flow blue print?

• Secondly, how do they repair the damage the abrasive dynamic duo Trujillo and McGauchie have done to relations with the government while negotiating a way through the complex and emotional NBN minefield without Telstra shareholders suffering more collateral damage?

Impact:

• At the 1H09 results presentation the FY09 guidance and 2010 Long-term Management Objectives were updated. They have been reaffirmed at broker conferences - the latest on 8 May where Sol concluded his presentation - "Let me finish by re-iterating Telstra is on track to deliver free cash flow of $6 to $7bn in FY10."

• The appointments of Thodey and Livingstone indicate an end to the confrontation that overwhelmed relations between Telstra and the government. Further evidence of the fresh olive branch philosophy is the major shift in workplace relations. It would not be in Telstra's best interests to engage in discussions and negotiations with the government on NBN while being at loggerheads with Labor's new workplace relations regime. Clearly Thodey has quickly adopted a more conciliatory approach to all things government.

• We look forward to David Thodey's first utterances on earnings and FY10 free cash flow guidance. He will have to inform the market sooner rather than later. Negotiations on NBN participation will create plenty of noise. It appears the market is already factoring in some form of separation.

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