Investors hang up on Telstra

The slump in the Telstra share price to a near-record low speaks volumes about what investors think of the Rudd government's draft legislation to establish a regulatory framework for the $43 billion National Broadband Network (NBN):  Telstra is screwed.

Telstra stock has fallen 11.5 per cent since it announced a worse-than-expected interim profit two weeks ago.

In our latest Investor Pulse survey, Telstra’s shareholders blame the telco giant’s poor performance on a series of bad management decisions, a monopoly mentality and delays in negotiating a deal with the Rudd Government over the NBN.

A massive 75 per cent of investors on a shareholder panel of 2000 surveyed by Colmar Brunton for Investor Pulse, believe the NBN will be bad for Telstra.

In a testament to how much work lies ahead for Telstra’s management, 56 per cent of investors were unsure of the long-term impact on the company of the NBN. Reflecting this uncertainty, 57 per cent wanted to see an accelerated settlement with government.

Other legislation to be released in parliament today, which forces Telstra to divest its cable network and its 50 per cent interest in the pay TV group Foxtel (James Packer’s Consolidated Media and News Corp each control 25 per cent), has split investors.  

The legislation, which would compel Telstra to separate its wholesale and retail businesses or be denied valuable spectrum, has been proposed amid ongoing discussions about Telstra's involvement in the $43 billion NBN.

Fifty three per cent of investors supported the legislation aimed at separating Telstra into wholesale and retail operations in the name of better competition, while 47 per cent believe it will be to Telstra’s detriment.

Investors were concerned that the share price could fall further if the Future Fund decides to sell down its 10.9 per cent stake in Telstra.

As of Tuesday, the Future Fund can resume selling its holding in Telstra, after agreeing not to sell any shares for six months after dumping a third of its stake last August. The Future Fund, which was set up by the government in 2006 to invest budget surplus cash for retired civil servant's superannuation payments, dumped 684.4 million Telstra shares, leaving it with 10.9 per cent of the company.

Fifty three per cent of investors believe the Future Fund will sell its stake in Telstra and 30 per cent believe it will be detrimental to the company.

The good news for Telstra boss David Thodey is that investors have not yet lost faith in his leadership. When asked who was the best manager of Telstra, Thodey, Sol Trujillo or Ziggy Switkowski, the consensus was that Thodey was the best, followed by Switkowski then Trujillo.

On his personal performance, Thodey is enjoying a considerable lead in perceived competence over former CEO Ziggy Switkowski and a huge lead over the recently departed Sol Trujillo. There is, perhaps, some incumbency effect at work, and more sobering still, the very low rating of Trujillo is also delivering a honeymoon period for Thodey.

But the margins for approval of current management performance are thin and, after the recent reporting season, getting thinner. Almost a quarter of investors confessed to losing faith in Thodey’s team, while 55 per cent said they had lost faith "somewhat" after a sequence of profit downgrades in the past year.

Only 22 per cent professed unconditional support. When asked if current management should be replaced 47 per cent believed they should.

Worryingly for management, the reasons behind the growing disenchantment are what might be described as structural issues. Seventy five per cent of investors believe Telstra is unable to halt the slide in its fixed-line revenues.

An even higher 84 per cent agreed that Telstra suffered from a ‘‘monopoly mentality’’ which inhibited its ability to respond to competitors quickly. 81 per cent also thought that Telstra had misjudged its customers and used its dominance to hold back technological breakthroughs.

The recent poor performance of management is also apparent in the priorities shareholders outlined for the successful running of the business.

Shareholders ranked ‘‘price competitiveness’’ as the number one feature of good customer service. Shareholders also saw that this was an integral part of company strategy as half advocated building market share in mobiles and broadband as the best avenue to restoring EPS growth.

The failure of Telstra to respond to price cuts by competitors in the second half of last year has clearly annoyed shareholders. According to investors, the second and third features of good service were promptness in installation and repair, as well as swift service over the phone. Fourth and fifth were helpful staff and bringing new technologies to market.

Clearly there is room for improvement with Telstra seen lagging Optus in overall service, though it enjoys a considerable lead over Vodafone.   

On holding Telstra shares relative to peers, 31 per cent of investors expressed a willingness to buy Optus shares in the event of a listing. Eleven per cent were incensed enough to say that they would trade out of their Telstra shares and buy Optus shares if they had a choice.

aferguson@fairfaxmedia.com.au