As an investment, Telstra doesn't need to be complicated. And the full year results add evidence to that thesis.
As anyone who has tried to get help from Telstra knows, it’s a complicated beast. If the Telstra employee on the other end of the phone can’t work out which of Telstra’s hundreds of divisions we should be transferred to, what hope are we of valuing the business?
None, if our aim is to value Telstra bit by bit and piece by piece. With operations from high speed mobile broadband services to the old school job of producing phone books, this is a complicated business.
Taking a step back, however, our thesis has long been that, as an investment proposition, Telstra can be dramatically simplified. It owns most of the fundamental communications infrastructure in Australia and, whether people are communicating via fixed-line phones (PSTN), mobile phones, or video conferencing over the internet, Telstra is going to clip the ticket. The trend is towards more communication, not less, and that means Telstra is likely to remain exceptionally profitable.
Background information
Telstra reported a $4.1bn profit for the year to 30 June 2009, a 10% increase on the previous year. Total revenue was only 2% more but mobile and broadband revenues grew strongly – up 10% and 16% respectively – more than offsetting the decline in traditional fixed-line revenue.
Operating costs increased 2% but lower interest rates translated into a 16% decline in finance costs – one of the main contributors to the overall increase in net profit. The final dividend was maintained at 14 cents, taking the full year payout to 28 cents (fully franked). |
So, while the myriad of analysts at today’s results briefing were seeking information to enable them to refine their financial models to the third decimal place, we were looking for evidence that confirms or rejects this thesis. So far, so good, is the conclusion at this point in time.
Gathering evidence
Traditional fixed line telephony revenue declined 5% on the previous year, but this decline was more than offset by the increase in mobile and broadband internet revenue. Total mobile revenue, including handset sales, surpassed PSTN revenue for the first time ever. In the second half, 80,000 broadband customers upgraded to Telstra’s highest speed (20 Mbps) broadband service. Despite a slight decline in broadband customers in the second half, Telstra was able to increase its revenue 16% thanks to substantially higher revenue per user.
Faster internet speeds are enabling dramatic changes in the way we work and communicate. The days of businesses and individuals storing data on their computers at home or on internal servers are limited. Cloud computing – where information is stored in massive specialised computer warehouses and accessed over the internet – is replacing local storage at a dramatic rate. The days of downloading Microsoft Office on to your computer are also limited. As soon as internet speeds are fast enough, your personal computer will simply be a gateway to the internet, where you’ll be able to access all of your files and programs from anywhere in the world.
Essential infrastructure
Telstra is not about to suddenly become a ‘growth stock’. All this extra data requires substantial capital investment and, the more people use, the cheaper it gets. But this infrastructure will remain essential to the functioning of modern Australian society. In fact, you could argue it is more essential than ever. And that means Telstra will continue earning adequate returns for shareholders.
Financials
Year to 30 June |
2007 |
2008 |
2009 |
2010E |
|---|
Revenue ($bn) |
23.7 |
25.0 |
25.6 |
26.4 |
NPAT ($bn) |
3.3 |
3.7 |
4.1 |
4.3 |
EPS (c) |
26 |
30 |
31 |
34 |
PER (x) |
14.0 |
12.0 |
10.9 |
10.4 |
DPS (c) |
28 |
28 |
28 |
28 |
Fkg (%) |
100 |
100 |
100 |
100 |
Yield (%) |
7.8 |
7.8 |
7.8 |
7.8 |
The new national broadband network is an obvious threat to Telstra’s dominance. But, as we argued in Telstra’s regulatory Ruddache, the network can’t be built without Telstra’s co-operation. And, even if the company is forced to split into two, the combined value shouldn’t be substantially less than the current share price.
We’ve no reason to doubt the underlying competitive advantages of Telstra’s business. While we’re sticking with our previous recommendation, we’re comfortable with Telstra as a core holding in a well diversified portfolio. HOLD.
Disclosure: Staff own shares in Telstra but they don't include the author, Steve Johnson.
Sat 11 Sep 2010 4:30 
