Once Smitten, Twice A Tad Shy

Sydney Morning Herald

Wednesday October 6, 1999

ELIZABETH KNIGHT

The one scary thing about the T2 float is the extent to which the public appears to be borrowing to take up stock, with the Commonwealth Bank pulling advertisements for T2-specific loans.

This makes the private investor far less robust in the event that Telstra's share price moves down rather than up.

Traditionally, small investors are reluctant sellers. They are happy enough to stag a float but thereafter are more inclined to put their stock in a drawer.

This in turn adds to the stability of a company's share price.

But this time around there are plenty of Telstra punters who made such a monstrous profit on T1 that they are unconcerned about gearing up for T2.

The instability arises because if the T2 share price falls below the 40c discount at which the mum-and-dad investor will pick up stock, then the geared buyer will be looking for a quick sale.

Neither Finance Minister John Fahey nor Telstra chief executive Ziggy Switkowski would be happy with the prospect of voters and small shareholders respectively selling in droves at $7.40.

This is why Fahey should exercise particular care in the pricing to encourage a healthy after market. It looks clear enough from the first day of institutional offers that the Australian fund managers have gone in early.

The co-ordinators have made it clear that ``price setters" will be smiled upon when it comes to final allocations.

The message received loud and clear from the sales team was that the safest way for institutional investors to ensure a reasonable allocation was to bid high and bid early.

While it might be politically more favourable to push the allocation to small investors, it must be weighed up against the fact that the big investors pay 40c more per share.

There is a belief that Australian institutions on average have bid over $8 and that European institutions were happy enough with $8.

They are pushed on by Telstra's inclusion in the Morgan Stanley Capital International (MSCI) index.

The US players have made no secret of the fact that they think Telstra is overvalued compared with their local telcos.

Regardless of what the US boys do, the fact is that Australian institutions will lap up this float because stock is tight.

When you give half of an issue to small institutions there is always some supply and price tension because the index players are underfed.

The last thing these index players want is for the gap between what they get and what they need to be large.

It is more advantageous to pay a little more for the stock upfront and not have to push it up in the after market.

The institutions that have supported the stock since T1 will get some favoured treatment.

In other words, those offshore players that sold out three weeks after the listing of T1 will probably not get a look-in this time unless there is trouble finding enough buyers at a respectable price.

For the mums and dads, there has been a strong trend to follow the advice of advisers and hold off until the last minute.

John Fahey came out yesterday and criticised media suggestions that some stockbrokers had a lot more shares than the current demand.

He said to date more than 750,000 applications had been received.

But this is less than half the number of prospectuses applied for.

Needless to say, there will be a last-minute rush on Thursday when the retail investor offer closes, but perhaps not the rush of T1.

Based on the movement in the Telstra share price this calendar year, there is no reason to be too excited about capital gains.

The share price is the same now as it was in January.

(Of course, if there are capital gains, there is a least a chance that the tax will be halved.)

Telstra is certainly a company with a good growth story and wonderful cash flow.

But share price growth of late has not been inspiring.

There should be appreciation in the share price for investors but there is not the radical upside that the T1 investors experienced.

Fahey had a very easy job selling T1.

There was far more explaining to do and the task was more technical, but the story was easy.

Selling an Australian icon which had a near monopoly was like falling off a log.

But times have changed. The market has already placed a proper value on Telstra so the appropriate sale price should contain few surprises. It should not deviate too far from the market value.

Investors, both large and small, also have a clearer view on the workings of Telstra and its prospects.

There is a growth element built into the current share price.

This is based on the belief that Telstra will continue to grow profit from new businesses at a faster rate than it loses business in its traditional lines.

The public should also recognise that if Telstra loses that profit momentum, the share price will be punished.

© 1999 Sydney Morning Herald

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