The headline numbers deceived. Net
profit growth of 3.6%, earnings per share growth of 37.4% and a
buyback of $1.5bn all gave the impression of a growing, stable business (see
Table 1) but that impression isn’t quite right.
The numbers were flattered by the sale
of the Autohome business, which generated a profit of $1.8bn.
Without that sale, Telstra’s performance
wasn’t as riveting with EBITDA up just 2.6% and revenue less than 2% higher. In
its key divisions – mobile and broadband – operating profit was slightly
negative or flat, depending on how you measure it. This was a result that
displayed weakness rather than strength.
pinch isn’t just from the NBN; it is also evident in the mobile business.
Although customer growth was strong – Telstra added 560,000 new customers
to its network therefore revenue actually fell.
can that be?
Operating Profit Margin
are two reasons. Firstly, the average revenue per user fell about 1% to (a
still astonishing) $68.40 a month, the highest in the market. More important
was the impact of competition.
maintain subscribers, Telstra is being forced to offer more inclusions,
particularly higher data limits across all plans. It has also joined the rest
of the industry in introducing fixed charges for additional data.
has eliminated hundreds of millions of dollars the business once earned from
charging customers usurious penalty rates for exceeding data caps. That profit
will not return. This highlights Telstra’s plight and illustrates why the
negative on the stock.
added half a million customer accounts but, because the market is more competitive,
it still made less money. There is no clearer proof that the mobile business
has been overearning for years and returns are now falling.
margins of 42% offer plenty of room for returns to slide further.
Internationally, these margins are unmatched outside monopoly providers.
Revenue AUD Mil
Gross Margin %
Operating Income AUD Mil
Operating Margin %
Net Income AUD Mil
Earnings Per Share AUD
Payout Ratio % *
Book Value Per Share * USD
Operating Cash Flow AUD Mil
Cap Spending AUD Mil
Free Cash Flow AUD Mil
Free Cash Flow Per Share * USD
Working Capital AUD Mil
Return on Equity
mobile generating 40% of all revenue and a similar proportion of profit,
falling returns is a problem that isn’t easy to fix. Management’s solution is
to pour billions of dollars into the division. Over the past few years,
Telstra has spent an average of 15% of revenue on capital expenditure. That sum
will now climb to 18% for at least the next three years to defend
cash were pouring into the fast growing parts of the business, we would be more
comfortable that the spending would ultimately lead to higher earnings.
Instead, capex is being used as a competitive weapon to shore up margins that
are too high and, in my view, bound to fall.
Items (in %)
& Short-Term Investments
Return on Assets
may not have much growth but it does have plenty of cash and it isn’t shy about
cash flow of $7bn (I had to adjust operating cash flow line for interest
charges which Telstra doesn’t include) was enough to cover capital expenditure
of $4.4bn, but generous dividends and a $1.5bn buyback requires proceeds from
Autohome and continuing payments from NBN.
NBN deal, celebrated at the time of its announcement, will ultimately cost the
business between $2–3bn per year in EBITDA, cash that will be hard to replace.
Telstra is slowly shrinking.
have been drawn out 6.39% from 2015, therefore the payables period has increased
and cashflow is weaker in 2016.
Considering the inclusion of 560,000 new customers in 2016, inventory
turnover has increased by 16.49% compared to 2015.
Liquidity and Solvency
the buy back and selling of assets in 2016, the current ratio has increased. Without
this income, the current ratio would be weaker as compared to 2015.
Leverage has decreased due to the payables period increasing in 2016 as compared
to 2015, therefore cashflow is weaker in 2016.
score card is one of the best in the world among incumbent telecommunications
companies. It is also well-positioned to increase its business in the emerging
digital, sharing and networking economy. It is successfully transforming itself
into a full services ICT company.
mobile network is, and will continue to be, well-positioned to offer superior
services to those offered by the NBN company. Their aggressive pursuit of 4G,
and next on the list 5G, will guarantee this. While these mobile networks will
not cater for all of the ‘big iron’ broadband services, because of the
company’s superior and most likely competitive offering, a large number of
mobile-based access services will be used in this way. The ongoing delays in
the actual availability of the NBN are also playing in Telstra’s favour.
Furthermore, through its national Wi-Fi and fibre backbone networks it can
rapidly offload any heavy broadband traffic from its mobile network onto its
covered in this synopsis:
Vodafone, FOXTEL, SingTel Optus, Sensis.
Share Market Performance
Dividend Payout ratio
Payout Ratio % *
payout ratio decreased due to NBN investments in 2016.
Earning Per Share
Earnings Per Share AUD
per share remained steady due to the $1.8b profit on sale of Autohome shares
all of Telstra is stagnant. There are parts of the business that are growing
rapidly. The network application business, for example, has performed
splendidly but it generates less than 2% of profit. Despite efforts at diversification,
Telstra remains a mobile and broadband business. Any change to than mix will
involve a large risky acquisition.
and profits from key divisions is falling without remedy and more money is
being ploughed into maintaining returns I think are unsustainable. There is a
chance the business can buy a terrific asset to replace lost earnings but this
is a risk as much as it is an opportunity.
even with those problems, this is a powerful cash generator yielding 5.6%,
fully franked. Telstra’s payout ratio, at 98%, is already maxed out and,
after NBN payments cease in 3–4 years, dividends will fall unless growth can
generate additional cash flows.
don’t recommend chasing yields but this one, for the next few years at least,
is large and sustainable. And it’s better than just about any other blue chip
yield available right now. For that reason alone, Telstra earns a “HOLD”.
12 month price range
$3.38 – $5.22
Market cap (m)
Total shares (m)
Year to Jun
Long Term Debt
Operating Margin (%)
Income Tax Rate (%)
Return on Capital (%)
Return on Equity (%)
Payout Ratio (%)
Profit & Loss
Net Profit Before Abs ($M)
Net Profit After Abs ($M)
Customer Receipts ($M)
Net Operating Cashflow ($M)
Net Investing Cashflow ($M)
Net Financing Cashflow ($M)
Market and Earnings
Market Cap ($M)
Dividend Yield (%)
Total Current Assets ($M)
Total Non-Current Assets ($M)
Total Assets ($M)
Total Current Liabilities ($M)
Total Non-Current Liabilities
Total Liabilities ($M)
Total Shareholders Equity ($M)