Analysts take knife to Telstra valuation after profit warning

CANBERRA - Telstra's valuation was cut by analysts at Citigroup and three other firms after Australia's largest telephone company reduced its earnings forecast, which may force the Government to accept a lower price for its stake.

Citigroup analyst Tim Smeallie lowered his target price for Melbourne-based Telstra's stock by 14 per cent to A$3.75 after chief executive Sol Trujillo on Tuesday said profit might fall 30 per cent this year. Analysts at Macquarie Bank, Goldman Sachs JBWere and Merrill Lynch also lowered their valuations.

Trujillo forecast a profit drop that was triple Telstra's estimate in September because of spending on networks and costs to fire as much as 23 per cent of its workforce. Telstra's stock fell after his statement, cutting the value of the Government's 51.8 per cent stake, which it wants to sell in 2006 for as much as A$5.25 a share, or A$33.8 billion ($36 billion).

"The Government's target of A$5.25 a share is looking very, very optimistic," said Craig Young at Tyndall Investment Management in Sydney.

"There's a lot of bad news over the next year with increased costs, uncertainty over regulations and dividend cuts."

Telstra's stock had its biggest fall in four years on Tuesday, reducing the value of the Government's stake to A$26 billion, less than its target.

Shares of Telstra were unchanged at A$4.02 at the 4pm close in Sydney yesterday. They have fallen 18 per cent this year while the S&P ASX 200 Index gained 14 per cent.

- BLOOMBERG