Telstra: A Good Value Stock or A Value Trap?

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Australian Economy

Telstra Corporation Limited (ASX: TLS), which is a telecommunications and technology company has its principal activity to provide telecommunications and information services for domestic and international customers. With regards to the fundamentals, TLS is a blue-chip company with a market capitalisation of 37.82 billion and with a single digit PE ratio of 9.94. Telstra’s privatisation strategy was noted to be the one that was driven efficiently and its T1 and T2, its first couple of tranches were known and can be still easily recalled by Australian investors. T1 was the first one with a share price of $3.3 in 1997, while T2 was released in 1999 by a cooperative government at a share price of $7.4 per share. Today after the two decades from the midpoint of those two first sales, the share price stands below T1 that is around $3.2. During this course, dividends were paid which helped in turning a negative share price return to a positive one over the couple of decades. Even after recent trimming of dividends, the annual dividend yield of the Company is 7.3 per cent.

Telstra has significant balance sheet capacity with the ability to fund new investment in many regions including Asia and the group banks on various capital management initiatives. It secured Telkom Indonesia as a JV partner which was a positive outcome of its strategy and it will be an exclusive provider of network application and services or NAS, in Indonesia. Meanwhile, the Group sold its remaining 6.5 per cent interest in Chinese online business, Autohome to Ping an Insurance Group for US$217.

Telstra released its half year results for financial year 2018 and reflected an increase in the number of subscribers on mobile and the Group reported a total income (including the Ooyala impairment) rise of 5.9 per cent while EBITDA was down by 2.5 per cent. Net profit after tax (including the impairment) and EPS were down by 5.8 per cent and by 3.4 per cent respectively. Until the end of December 2017, Telstra had invested approximately $1.4 billion of additional capex and this included $1.3 billion on networks and $100 million on digitisation. The Board resolved to pay a total fully franked interim dividend of 11 cents per share that comprised of an interim ordinary dividend of 7.5 cents per share and an interim special dividend of 3.5 cents per share, consistent with Telstra’s revised dividend policy and FY 18 guidance. The group has also witnessed improvements through digitisation program, as the need for customers to call the company reduced with calls down 13 per cent compared to last year while active users of 24×7 app grew by 24 per cent in the half.

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Financial Highlights (Source: Company Reports)

The group launched a mobile hotspot device that is Telstra Nighthawk M1, in partnership with Qualcomm, Netgear and Ericsson, and the same is currently the fastest mobile device in the world and can deliver an incredible one gigabit per second download speed. Last year, the company announced its intention to invest up to $3 billion over the next three years to achieve a further step change in strategic positioning to deliver economic benefits of more than $500 million of EBITDA by 2021. Recently, Telstra and News Corp completed the transaction to combine Foxtel and FOX SPORTS Australia.

In the past few months, TLS has highlighted that NBN is expected to have around a $3 billion negative impact on the earnings on a full roll out. On the other hand, Telstra intends to return about 75% of net one-off NBN receipts over time through special dividends to the shareholders. The group now expects to pay a total dividend of 22 cents per share, fully franked, in FY18. The group aims to keep on delivering value through better customer experiences, growth from core business and by building new growth businesses close to the core.

TLS continues to find support from management team’s strength, its ability to deliver decent earnings, strong market share, position as the key reseller of the NBN and productivity programs. On the other hand, impact from nbn, competition from TPG Telecom that is planning to build a network in Canberra, and other factors are impacting the stock performance. The share prices have been falling and were down by 29 per cent this year till date while the stock witnessed some recovery in the past one week (1.94 per cent) at the back of confidence on its long-term potential and ability to manage challenges. It is worth noting that the group is considered a bit better than peers, including Vocus Group, which has not made any progress on bids for its New Zealand Business and aims to extend its debt covenants.

As mentioned above, the Company revised its FY18 guidance due to the impact of nbn co.’s announcement on ceasing of sales on hybrid fibre co-axial technology for six to nine months from 11 December 2017. On the other hand, this delay in NBN rollout will be financially positive to Telstra over the full rollout because of natural hedge. We also expect that 22 cents per share dividend is sustainable with support from a potential write-down of the NBN by the Federal Government, the arrival of 5G internet, and the company’s cost-cutting opportunities. The group also aims to reduce its inflated cost base through the digitalisation and simplification of its business.

On May 01, 2018, the group reported that voice calls across Australia were impacted by a major outage in Telstra’s 4G network while 3G calls were not impacted. Particularly, customers from Melbourne, Sydney, Brisbane, Perth, Adelaide, South Yarra, Kew, Merrylands, Parramatta, and Brunswick were the first ones to complain about the issue. TLS clarified about working on the issue and resolving the same at the earliest.

Coming back to the TLS stock performance, the stock is up from its 52-week lowest price and trades at $3.2. While short-term headwinds might prevail, the group has the potential to manage the same and sail through along with establishing drivers for growth in future.


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