Mitchell Bingemann and Michael Sainsbury

THE upward surge that Telstra shares experienced on the back of the Government’s $43 billion NBN announcement petered out yesterday as investors came to grips with the realities of the decision.

Telstra shares held steady at $3.35 in a falling market, after rallying 4.3 per cent, or 14c, on Tuesday.

Financial analysts attributed the initial share price surge to two main factors: market doubt that the Government’s $43 billion network would ever be built, and the belief that Telstra stands to benefit from being invited back into the NBN process.

Former Telstra chairman Bob Mansfield welcomed the Government’s decision to allow Telstra back to the negotiating table.

“It’s a courageous decision by the Government,” Mr Mansfield told The Australian. “I applaud the vision. Everyone is talking about how the Government should be spending more on infrastructure. I think it’s taken everyone by surprise.”

But Mr Mansfield also warned that if the Government’s scheme was implemented, it would certainly affect Telstra’s market value, “maybe not in three years, but certainly on a longer time horizon”. Yesterday, the first doubts about Telstra’s long-term market value crept into investors’ minds. Most major investment banking and financial services firms maintained hold recommendations on Telstra shares, but some did respond to this week’s news with upgrades to buy.

Goldman Sachs JBWere and Citi analysts upgraded their recommendations on Telstra shares to buy and hold, respectively, while JPMorgan and Nomura maintained hold recommendations. Macquarie Research Equities retained its Underperform recommendation for the telco.

The firms also narrowed their 52-week share price targets, which now range between $3.21 and $4.20.

“We see this as the Government’s way of encouraging Telstra to co-operate, as opposed to a significant reform plan. Telstra’s reasonably conciliatory announcement suggests this will be the company’s mindset,” Goldman analyst Christian Guerra said.

“We say this because, in our view, the outcome that drives the most significant value destruction for Telstra is non-participation in the NBN.” But while the readmittance of Telstra into the NBN process helped to buoy its share price, other analysts attributed the rally to a long overdue response from a market that has been climbing steadily over the past couple of weeks.

“Compared to the rest of the market, Telstra has underperformed by at least 25 per cent on the last month. So it’s a bit of a relief rally. Even if it had been a bad NBN outcome for Telstra and Optus was appointed, this might have happened,” one analyst said.

Some analysts also said that the prospect of the NBN never being built had also helped boost the telco’s share price.

Mr Guerra said the NBN could fail due to a lack of investment from the private sector and because consumers were increasingly shifting to wireless technology. “There’s a real possibility of the NBN failing to eventuate. “The key issue is demand, which, in our view, will be compromised by the shift to wireless and poor demand for the new NBN from fixed-line players,” he said.