TLS - Telstra Corporation

[Miner]

Did you happen to read the Chairman's statement that was recently released? They've basically said they have a $2-3bn hole in earnings coming up... No real plans on how they remedy that from what I can tell.

To add to that, the ACCC have decided to progress further down the regulation path for ADSL services:
http://www.arnnet.com.au/article/608521/accc-rules-continue-adsl-regulation-amid-nbn-rollout/

I must say, the future does not look too bright for Telstra.

Klogg
I did read the statement from Chairman.
What I have however noticed the improved customer service (even long waiting on phone) from Telstra for last 12 months (thanks to competition and I got 5 G modem and 100 GB bonus - working great), poor performances from VOC and TPG, Telstra's massive strength of technology/manning and experience, recommendation from Motley Fool (I bought TLS yesterday about 50 cents lesser price however what MF recommended), Market Matters recommendation to buy TLS today.
Some times new CEO and Chairman do provide a gloomy picture with intention to show off how wonderful turnaround they did to get their performance bonus. To me it is game plan of those figure. Same people will read the figures differently looking every thing good after one year. That could be my cynical observation but technically I am confident on TLS performance for long term meaning in 2018. Made the mistake to sell off TLS after getting them from public offer (like many of us probably did). But technology has changed and so is TLS (things could change once competitors disappear). Optus is pathetic any way.
Current some of the valuations describe TLS is lower priced than its real value. Which has been echoed by Market matters also.
Sorry for a long answer to your short question.

Regards

Extract from Market Matters (within copy right and taken from free email)
" Telstra (TLS); At current prices TLS trades on a forecast yield of 6.1% plus franking (8.7% gross) based on 31 cps forecasted dividend – which is likely to stay flat until at least FY19 on our numbers. The stock is not overly expensive trading on 14.2 times expected FY17 earnings, so about a 15% discount to the market. Surely with these metrics TLS should be a BUY here??

The risk as we’ve been highlighting in recent times stems from the artificially inflated earnings courtesy of the one-off NBN payments. Although the BIG one off payments seem impressive, it will come down to Telstra’s ability to reinvest those payments, given they lose $2bn-$3bn of re-occurring earnings over the next 3-3.5 years. That said, it seems this is now a very well known-known with the market having digested this over the last few months – hence the weakness in the stock. The reason we say this is that when the market is collectively positioned a certain way as it is with TLS (shown by analysts’ views below) it sets the scene for strong counter trend moves. At some point, TLS will rally hard and we’ll be looking to get set for this when it happens" .

 

[Toyota Lexcen]

Err, bear market?

yes we in a bear market, April 2015 we almost got 6000, been down to 4800 now stuck between 5000-5500 for quite a few months

TLS got up to 6.70 around april 16 now down to 5.00, its a great company but general uncertainty is impacting the market

I don't believe it will clear up for 5-10 years

 

[dpgrubesic]

TLS at very least moderate buy at todays prices

+ Net profit is still growing

+ It is a industry leader

+ It is well below its 18 month high

+ Dividends are 6.2% (in a low interest rate environment)

I dont think you can expect 15-20% p.a returns but i'd say the Warren Buffet 10%p.a isnt out of the question

However there are some concerns...

- Rising in long term debt being one
- Slowing organic growth

I'd say it its a buy at around the $5-5.50 mark, simply put if people start to move away from TLS to cheaper alternatives TLS can just become more price competitive. However TLS is and always will have the best service because of certain advantages. So in short TLS can always get 'cheaper' if they want but competitors (at least in the mid-term) wont be able to match the level/quality of service on offer. Therefore people who need the best phone coverage, best internet have one option.

In fairness there probably are better Stocks out there but IMO TLS is a safe defensive stock probably better for those needing reliable dividend returns and wanting to sleep well at night.

Note: Im 26 and probably looking at taking a bit more risk but considering everyones super in Australia pretty much has stocks in TSL and the big Banks i thought i'd give me 2cents/

David Out....

 

[Miner]

yes we in a bear market, April 2015 we almost got 6000, been down to 4800 now stuck between 5000-5500 for quite a few months

TLS got up to 6.70 around april 16 now down to 5.00, its a great company but general uncertainty is impacting the market

I don't believe it will clear up for 5-10 years

OMG - that is a very brave prediction - 5 to 10 years. What happened to my hard earned money I invested couple of days back to retire safely !!!
Let me enjoy my red now as I can not resell even with 2 % gain over three days

 

[Toyota Lexcen]

yes, a few fund managers have called it a bear market (WAM capital in particular) with view for the market to improve 2017, many now pushing out expectation of turn around to late 2017, even that is generous

what sort of market are we in? bull market?

 

[Miner]

yes, a few fund managers have called it a bear market (WAM capital in particular) with view for the market to improve 2017, many now pushing out expectation of turn around to late 2017, even that is generous

what sort of market are we in? bull market?

Toyota Lexcen
Market behaviour tells we are in bear market and probably go another 12 months by experts. But those experts change their colour like Melbourne weather on a day.

Cheers

 

[dpgrubesic]

Toyota Lexcen
Market behaviour tells we are in bear market and probably go another 12 months by experts. But those experts change their colour like Melbourne weather on a day.

Cheers

100% correct

 

[Klogg]

TLS at very least moderate buy at todays prices

+ Net profit is still growing

+ It is a industry leader

+ It is well below its 18 month high

+ Dividends are 6.2% (in a low interest rate environment)

I dont think you can expect 15-20% p.a returns but i'd say the Warren Buffet 10%p.a isnt out of the question

Is net profit still growing? Again, there's a $2-3bn hole in EBITDA coming up... That's a little scary given total EBITDA was just over $10bn...

As for the "Warren Buffett 10%p.a."... check Berkshire Hathaway's returns - they're far higher than 10%.


@Miner
Appreciate the response. Just a few things I'd mention:
1) Not sure I'd take the Motley fool's advice on anything. Track record is not great. I know nothing of Market Matters, so I won't comment there.
2) Customer service - sure, this helps. But telecommunications is largely commoditised at the retail level. People will pay less and complain, rather than pay a premium (somewhat similar to airlines) - the device is a different story. And with the recent series of network outages, it'll take a while for Telstra to get that goodwill back.

"But technology has changed and so is TLS"
Technology as a whole has, but for the worse for TLS shareholders. The impact of NBN is not a positive one for Telstra.

 

[dpgrubesic]

Is net profit still growing? Again, there's a $2-3bn hole in EBITDA coming up... That's a little scary given total EBITDA was just over $10bn...

As for the "Warren Buffett 10%p.a."... check Berkshire Hathaway's returns - they're far higher than 10%.


@Miner
Appreciate the response. Just a few things I'd mention:
1) Not sure I'd take the Motley fool's advice on anything. Track record is not great. I know nothing of Market Matters, so I won't comment there.
2) Customer service - sure, this helps. But telecommunications is largely commoditised at the retail level. People will pay less and complain, rather than pay a premium (somewhat similar to airlines) - the device is a different story. And with the recent series of network outages, it'll take a while for Telstra to get that goodwill back.

"But technology has changed and so is TLS"
Technology as a whole has, but for the worse for TLS shareholders. The impact of NBN is not a positive one for Telstra.

I wasn't talking about Berkshire i was talking about Buffett investing rule of companies with at least a 10 year history of a average of 10% return. - not saying its my way of investing but he says it all the time

NBN hasnt been positive for any telco so far that doesn't mean anything Australia needs it, it has some of the worst telecommunication in the developed world.

The fact is TLS still has competitive edge and people need telecommunication it is in a no lose situation. However I agree with people saying it is badly managed.

Additionally,nI agree with you when you say dont trust the fools though they have good 'general principles' however in my experience they are far better at marketing then they are at investing.

 

[Klogg]

I wasn't talking about Berkshire i was talking about Buffett investing rule of companies with at least a 10 year history of a average of 10% return. - not saying its my way of investing but he says it all the time

He actually says this about the business return on what he's paying (and I think it's 13%... but I remember that from a Bruce Greenwald interview). As an example, imagine Telstra had flat revenues and profits from now to eternity. At a price/earnings of 14times (approximate) this would equate to a return of 7.14% - far below the required rate of return he's after.

NBN hasnt been positive for any telco so far that doesn't mean anything Australia needs it, it has some of the worst telecommunication in the developed world.

Agreed, we need it. But the way its structured still required large wholesalers and a larger number of retail service providers. What I don't agree on is the fact that no telco will make money from it. The bandwidth charge (CVC from memory) will just get squeezed until retailers and wholesalers make their margin - meanwhile consumers will have 1/20th of the bandwidth they're paying for.

If there's no change in pricing, I can't see that as a sustainable outcome.

The fact is TLS still has competitive edge and people need telecommunication it is in a no lose situation. However I agree with people saying it is badly managed.

This seems to be a very generic statement. Can I ask where their competitive edge will come from? (Please be as specific as possible if you can - I don't do well with broad statements...)

Additionally,nI agree with you when you say dont trust the fools though they have good 'general principles' however in my experience they are far better at marketing then they are at investing.

Couldn't agree more.

 

[craft]

Agreed, we need it. But the way its structured still required large wholesalers and a larger number of retail service providers. What I don't agree on is the fact that no telco will make money from it. The bandwidth charge (CVC from memory) will just get squeezed until retailers and wholesalers make their margin - meanwhile consumers will have 1/20th of the bandwidth they're paying for.

If there's no change in pricing, I can't see that as a sustainable outcome.

Who will fold?
The customer and pay more?
The Telco industry and invest capital at below economic returns just to stay in existence?
The government and lower its pricing for the greater benefits of NBN utilisation to the economy?


General consensus at the moment seems to be that its all bad for the Telco's but I see it a little differently – NBN is is only ever going to be infrastructure, its never going to take on the customer facing role and billing system (the gov’t is never going to build another integrated type Telstra structure again after having so much trouble separating TLS) – That will always be left to the private sector and if they want the private sector to do it – it has to be economically viable. If the customer is truly price sensitive than I think the gov’t will yield before it makes the customer facing private part of the delivery system unviable (uneconomical). Be more efficient than average in the industry and you are almost guaranteed better than average economical returns - That’s a better dynamic than most business face. The important question – in relation to NBN – who is the most efficient retailer on a level cost basis – Don’t think its Telstra at the moment, becoming so is their challenge – I would agree though they are trying to lift their customer service and they can bundle other services for retail better than most.

Still a really interesting Industry to watch. Does it become a cosy four player industry with quasi competition underpinned by Govt having vested interest in the economic private delivery of critical infrastructure, (ala banks) or does competition go cut throat in a land grab for market share before things settle down to quasi competition with only two or three(don’t think It will ever be allowed to progress to a single winner scenario) main players remaining.

 

[Klogg]

General consensus at the moment seems to be that its all bad for the Telco's but I see it a little differently – NBN is is only ever going to be infrastructure, its never going to take on the customer facing role and billing system (the gov’t is never going to build another integrated type Telstra structure again after having so much trouble separating TLS) – That will always be left to the private sector and if they want the private sector to do it – it has to be economically viable. If the customer is truly price sensitive than I think the gov’t will yield before it makes the customer facing private part of the delivery system unviable (uneconomical). Be more efficient than average in the industry and you are almost guaranteed better than average economical returns - That’s a better dynamic than most business face. The important question – in relation to NBN – who is the most efficient retailer on a level cost basis – Don’t think its Telstra at the moment, becoming so is their challenge – I would agree though they are trying to lift their customer service and they can bundle other services for retail better than most.

Bolded section is exactly in line with my thinking (or perhaps it's your thinking, just rebranded... ) - couldn't have said it any better myself.

they can bundle other services for retail better than most

I'm not so sure of this. The big telcos all basically offer the same products now at the retail level. I can't think of a service that Telstra can provide me that the others can't (unless theirs is the only network available).

 

[dpgrubesic]

TLS has the best service being number one gives you the edge over your competitors this is true in any industry

http://www.lifehacker.com.au/2016/0...g-speeds-but-vodafone-matches-it-on-coverage/

Although others may close the gap they will always lag behind and for a strong portion of the market that is all that matters

 

[Ves]

Am I right in saying that you guys are focusing on the retail (NBN) internet side of things in this discussion? Surely the mobile phone networks themselves have some future potential for value generation (well, they'd want to after all the money Telstra has pumped into them and still continues to pump into them).

One think is for certain, Telstra is certainly ramping up their infrastructure spend. The last few years it has been the lowest as a percentage of sales since it first listed. If I recall the latest presentation states that going forward (ie. next 3 years) this is going back up to 18% of revenue, don't have the exact figures but in 2016 it was closer to 14-15%.

They specifically stated that they have budgeted a return higher than their current ROIC on these investments. Whilst it won't make up the 2-3bil EBITDA gap from the NBN transition, it's entirely feasible that in a world where mobile data transmission is growing at a rate of knots, they can definitely make some in-roads into this figure.

Not sure how their more expansionary business lines like e-health and even PacNet (underwater data cables I think?) will play out.

 

[craft]

Am I right in saying that you guys are focusing on the retail (NBN) internet side of things in this discussion? Surely the mobile phone networks themselves have some future potential for value generation (well, they'd want to after all the money Telstra has pumped into them and still continues to pump into them).

Its the retail NBN that I'm talking about - TLS mobile network is an example of the bundling I'm thinking about where they have pre-existing asset and cost advantages. I suspect TLS is a long way from being the most cost competitive lowest churn reseller of straight NBN but that lack of NBN retail margin is potentially offset in a bundled offering.???

 

[Ves]

Its the retail NBN that I'm talking about - TLS mobile network is an example of the bundling I'm thinking about where they have pre-existing asset and cost advantages. I suspect TLS is a long way from being the most cost competitive lowest churn reseller of straight NBN but that lack of NBN retail margin is potentially offset in a bundled offering.???

Maybe, I'm not sure. Telstra seems to run their services on much higher mark-ups than the competition.

How great is the profitability difference for Telstra between mobile customers contracted to Telstra and customers that use Telstra's network but are contracted to a reseller?

 

[Klogg]

Am I right in saying that you guys are focusing on the retail (NBN) internet side of things in this discussion? Surely the mobile phone networks themselves have some future potential for value generation (well, they'd want to after all the money Telstra has pumped into them and still continues to pump into them).

One think is for certain, Telstra is certainly ramping up their infrastructure spend. The last few years it has been the lowest as a percentage of sales since it first listed. If I recall the latest presentation states that going forward (ie. next 3 years) this is going back up to 18% of revenue, don't have the exact figures but in 2016 it was closer to 14-15%.

They specifically stated that they have budgeted a return higher than their current ROIC on these investments. Whilst it won't make up the 2-3bil EBITDA gap from the NBN transition, it's entirely feasible that in a world where mobile data transmission is growing at a rate of knots, they can definitely make some in-roads into this figure.

Not sure how their more expansionary business lines like e-health and even PacNet (underwater data cables I think?) will play out.

The mobile networks definitely have a value to them. From my basic knowledge of the mobile networks, I believe Optus and Vodafone are also increasing their investment (SSM and BSA are good proxies for this)

At an extra 3-4% of revenue (lets use 3.5% of $28.5bn) - that's $1bn of investment a year. I'm not familiar with margins on their mobile networks, but to plug a 2-3bn EBITDA hole, they'lll need a lot more than $1bn a year.

And from my knowledge, the other business lines are currently making a loss. I don't know much about it, but Forager have a decent summary on it all:
https://foragerfunds.com/bristlemouth/telstras-looming-earnings-hole/

 

[craft]

Bolded section is exactly in line with my thinking (or perhaps it's your thinking, just rebranded... ) - couldn't have said it any better myself.

Not sure if its a case of great minds think alike or fools seldom differ

I'm not so sure of this. The big telcos all basically offer the same products now at the retail level. I can't think of a service that Telstra can provide me that the others can't (unless theirs is the only network available).

Do they however all have the same cost base for the services they can bundle?

 

[craft]

but to plug a 2-3bn EBITDA hole

Is the asset transfers that creates this hole sufficiently unknown to not have been priced in since the original NBN deal was struck and disclosed years ago?

If its been disclosed why should they be desperate to fill the hole? If EBITDA is down in alignment with the assets sold and return on assets remains the same is it even really a hole?

Is it causation or justification of price movements?

Just ponderings - not really questions.

 

[Ves]

At an extra 3-4% of revenue (lets use 3.5% of $28.5bn) - that's $1bn of investment a year. I'm not familiar with margins on their mobile networks, but to plug a 2-3bn EBITDA hole, they'lll need a lot more than $1bn a year.

Don't forget the $1bn a year you have calculated is additional to what they have already been investing!

I had a look and over the last five years EBITDA has been a factor of 1.6 times EBIT on average.

Think their presentation said ROIC was 13-14%. Say they do beat this, and achieve 15% on new investments.

Correct me if I am wrong but to plug the 2-3billion EBITDA hole they'd need to invest between 8.33 and 12.5 billion. Obviously less if the returns are better.

That's not small change, but I think they've forecast $5bil in free cash flow next year. If they're brave (cut the divvie) and use a bit of leverage it's certainly not impossible.

A better question is do they have $12.5 billion worth of investments they can make that would achieve and sustain those returns in the next few years and beyond. And of course are the rest of the earnings outside of the gap sustainable in the face of competition, technological change etc.

If the answer to both of those questions are in the affirmative then even at $8 billion EBITDA run rate this company isn't exactly super expensive. At closer to 2016 EBITDA it's actually pretty cheap.

Unfortunately I haven't been able to answer either of those questions at this point. I do however, see where the doubt that comes from craft, yourself and the Forager and others have expressed.