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What Telstra Annual Results Mean for Investors?

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Telstra Corporation Ltd (ASX: TLS) announced a 39.6% fall in full year profits this year, as intensifying competition within the telco space resulted in heavy margin contraction. This is something that we have previously warned about, saying that growing competition from Vodafone and TPG is making investors slowly realise that the days of a two-player telco market in Australia are over. Telstra’s Internet of Things business grew revenue by 19.4% but failed to offset poor performance elsewhere within the business.

telstra corporation

Telstra’s FY20 guidance does not look that much better, since they anticipate a $800m-1bn headwind from the NBN. The payout ratio is now above 100%, meaning that the company could cut dividends.

Coming out of the result, it is clear that the benefit from IoT will not go primarily to telcos, since the bulk of their business is elsewhere. There was however some further talk about the 5G rollout and small cell technology development for cost savings. Optimism towards their 5G rollout caused the stock to rally almost 40% this year, as investors rewarded Telstra for developing its network earlier than competitors. While investors like companies with a strong first movers’ advantage, telco customers are not known for moving between providers quickly. Historically, there is little evidence to suggest that large numbers of customers switch service providers to access to a new network slightly earlier.

In analysing the recent rally, it is worth assessing Telstra’s 4G network, the bulk of which was rolled out in 2014 with the network completed in 2015. In 2015, the company also launched Cat-6 connectivity, a more advanced system that maximised network speed for customers and represented the pinnacle of what 4G has to offer. Since Cat-6 offered far superior connectivity, Telstra continued to rally for an extended period, as investors assessed the prospects of the network.

The share price sold off heavily once hype around 4G died, entering a multi-year downtrend. While we do not yet know the outcome for Telstra’s 5G rollout for sure, investors should think about if and why the 5G rollout will be different. The company is also a play on the US China trade war, given that the main reason Telstra is ahead on their 5G rollout is that competing networks from Optus and Vodafone have been delayed, while TPG has canned their network rollout after the Huawei Ban. It remains to be seen how long competitors will be delayed by the Huawei ban. Over the long term, any market share declines in profitable coastal cities will hit the telco’s profitability, due to the low incremental user costs of mobile networks.

The main cause of this is larger cities and cheaper mobile rollout costs can easily support multiple networks. Investors are pricing Telstra as though it is expected to maintain high market share at high margins, based on the company’s multiples.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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