The following is an exercise in normalised earnings. The starting point is the NPAT quoted in the income statement. The columnar corrections are then cross referenced by table header to the individual notes below. Lastly the corrected normalised NPAT is divided by the number of shares on issue at the end of the financial year to get 'earnings per share'.
Note Number |
|
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
(8) |
(9) |
No. Shares |
eps |
FY2022: |
[$1,814m-0.7( |
$165m |
|
-$61.6m |
+$127m |
-$183m |
+$233m |
|
-$71m |
+$32m)] |
/11,554m= |
14.2cps |
FY2021: |
[$1,902m-0.7( |
$275m |
|
|
|
|
+$802m |
-$180m |
-$211m |
-$103m)] |
/11,893m= |
12.6cps |
FY2020: |
[$1,839m-0.7( |
$420m |
|
|
|
-$308m |
+$1,536m |
-$130m |
-$259m |
-$133m)] |
/11,893m= |
8.8cps |
FY2019: |
[$2,149m]-0.7( |
$687m |
-$493m |
|
|
|
+$1,613m |
|
-$801m)] |
|
/11,893m= |
12.1cps |
FY2018: |
[$3,557m-0.7( |
$930m |
-$273m |
|
|
+$299m |
+$1,779m] |
|
|
|
/11,893m= |
13.8cps |
Notes
1/
Asset Sales & Sale and Leaseback Consequences
Gains in profits from a combination of:
i/ Net gain on disposal of Property Plant and Equipment and Intangible Assets.
ii/ Disposal of businesses and investments.
iii/ Gain on sale of leasehold transactions (sale and leaseback of exchange property)
....have been removed from the respective profits as follows: $165m (FY2022), $275m (FY2021), $420m (FY2020), $687m (FY2019) and $930m (FY2018). (See respective annual reports, note 2.2)
For FY2021, 'leasehold transactions' including the sale and leaseback (for a 10 year period) of the 16 story Pitt Street Telephone exchange building in downtown Sydney . The company received $262m for the sale of this building, which equated to a $102m net gain once the sale and leaseback arrangement was agreed to (AR2021 p113). Businesses disposed of over FY2021 include 'Telstra Velocity' (a regional high speed broadband provider), for a $60m gain after sale and leaseback, an e-commerce platform for $45m profit, and Telstra's minority interest in Sensis (owns White pages and Yellow pages and is responsible for Telstra directory service call centres) for a net gain of $1m, after accounting for a $34m impairment loss write down.
2/
Impairments in Income Statement
Telstra annually identifies 'impairment expenses' that form part of 'other expenses' in the income statement. While a company the size of Telstra can expect some impairments in normal business operations, some extra large impairments are highlighted. So I am adding these extra large detailed impairments back into each result, where appropriate, but not 'deferred contract costs' which unfortunately seem to be an ongoing cost of doing business. The specific information referred to below may be found in section 2.3 of the respective annual reports.
For FY2022 the impairment was $144m, (including $107m of deferred contract costs) - no adjustment made. For FY2021 the impairment was $162m (including $113m of deferred contract costs added back, but not including the $34m of impairment on the sold 'Project Sunshine holding' (Sensis stake) that I have already accounted for under note 1/.) - no separate adjustment made. Over FY2020 total impairment losses of $129m, include $124m of deferred contract costs - no adjustment made.
But over FY2019, as well as impairing $100m in deferred contract costs, Telstra impaired their legacy IT assets as a result of "making good progress in standing up our new IT platforms" (AR2019 p23) to the extent of $493m (AR2019 p29). I was concerned that I might be 'double counting' this IT platform restructure, given the very large T22 (for plan 'Telstra 2022') restructuring costs already declared under note 12. However if I go to p9 in AR2019:
"We are ahead of plan in our direct workforce reductions. The decision to accelerate these changes was made by carefully and deliberately to, in part, provide our people with certainty about their future. This resulted in an increase in Telstra's forecasted total restructuring costs from around $600m to approximately $800m."
If the IT asset costs were included in the $801m figure, that would mean labour restructuring costs over FY2019 were: $801m-$493m= $308m. Over FY2020 the comparable labour restructuring cost was $253m, but this was over a 8 month period. (From AR2020 p5: "In March we put all job reductions on hold for six months to give our people certainty over this difficult (pandemic) time.")
This means that if the FY2019 $801m transition charge, over the largest restructuring year, did include an IT equipment write off, then the labour cost on a 'per month basis' would have been less than the subsequent lesser restructuring year. From this I conclude the $801m 'extraordinary restructuring' charge was labour only, and the $493m IT write off was a separate charge. This $493m hardware/software impairment I have reversed.
From AR2018 p67 "During the period, there was a total impairment loss of $327 million related to goodwill and other non-current assets, of which $273 million related to Ooyala Holdings Group."
Over FY2018 Telstra wrote off $273m of their remaining goodwill from their investment in Ooyala Holdings Group, a video streaming platform, when it was sold back to the founders. I have reversed this one off write off.
3/
Retail Chain brought 'in house'
Goodwill write off over five years, starting from FY2022, through integrating independently owned Telstra Retail stores added back as a wholly owned Telstra business unit: [$92m + $216m]/5= $61.6m/year (AR2022 p148).
4/
Inter-year Financial Adjustments
Bond rate change on short term employee liabilities
$80m is listed as EBITDA from the positive impact of bond rate changes on employee liabilities (AR2022 p25). The same section in the previous annual report identified an "impact of bond rate movements on leave provisions," that was unquantified (AR2021 p23). I had originally thought the $80m was a superannuation scheme adjustment. But the superannuation scheme adjustment for FY2022 was $149m and not recorded in the income statement (AR2022 p77). Instead this $149m change was recorded in the 'statement of comprehensive income' (AR2022 p78). I therefore believe the $80m does not relate to superannuation provisions. Therefore I have removed the $80m bond rate adjustment as a rare one off effect.
Catch up revenue from previous years
$47m of 'catch up adjustments to revenue' have been removed from EBITDA for FY2022 (AR2022 p29 & p25)
These two effects sum to a total of $127m
5/
Ownership Adjustments for Subsidiaries & Investmnents
Amplitel (Tower Company) sell off costs
$125m of costs related to the partial spin off of Amplitel have been written back
over FY2022 (AR2022 p25), including $76m of stamp duty (AR2022 p29)
Acquisition Integration costs
$58m of integration costs related to the acquisition of 'MedicalDirector' and 'Powerhealth' expensed over FY2022 have been written back (AR2022 p25, p147).
Total adjustments for the equity sell downs and acquisitions made over FY2022 adds to $183m
Equity accounted NXE write off
Over FY2020 Telstra wrote off $308m of the value in their equity accounted investment in NXE Australia, which trades as Foxtel (AR2020 p166). This one off capital adjustment does not affect operating performance, so I have added it back.
Equity accounted NXE write back
Over FY2018 the Telstra stake in Foxtel was brought back into the company accounts as outlined in AR2017, p127. This relatively complex process unfolded as follows:
i/ As of 01/07/2017 (the beginning of the FY2018 financial year), 'Foxtel' was valued at nil on the Telstra books due to Telstra's cumulative share of equity accounted losses exceeding the carrying value on the books.
ii/ On 28/09/2017 Telstra's outstanding loan balance to 'Foxtel' was converted into equity, resulting in a $38m value gain being recognised under 'other income'.
iii/ On 03/04/2018 'Foxtel' merged with 'Fox Sports Australia' (externally owned by Newscorp), to form a new entity 'NXE Australia', with Telstra becoming a 35% shareholder in this new merged venture. Telstra's share of 'NXE Australia' resulted in the recognition of a $261m profit gain recognised in 'other income'.
iv/ As a result of ii/ and iii/, I have removed a total of: $38m + $261m = $299m of before tax profit from the FY2018 result.
6/
nbn transformation payments (net)
The federal government via nbn has been, year by year, 'buying out' the existing Telstra owned largely copper network via annual payments. The rolling network buyout payments have been recorded in the income statement as part of the total under 'other income'. This buyout process is now winding down. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these payments should be removed from 'normalised income'. One off NBN income that I have removed from my 'normalised results' amounts to: $233m (FY2022), $802m (FY2021), $1,536m (FY2020), $1,613m (FY2019), $1,779m (FY2018) (Refer post 20 for supporting calculations).
7/
'Hand of God' External Events
Covid-19 one off adjustments
Over FY2021 Telstra encountered $180m of Covid-19 headwinds (AR2021 p9) that may have included labour outsourcing and onerous rental leases. They then seemingly contradicted that by saying "Underlying EBITDA includes an estimated $380m million impact from Covid-19 (AR2021 p19). I have reconciled the two figures by noting that under the comment on mobile revenue (AR2021 p22) there was a decline in $200m from international roaming revenue: $180m+ $200m = $380m. Because Australia's borders were closed and hugely restricted over Covid-19 times, this reconciliation makes sense to me. However there were other operational effects of Covid-19, including greater use of working at home and video conferencing that equated to higher broadband usage. These change in use effects would somewhat offset the loss of income from international roaming. For this reason I believe the best measure of numerising the Covid-19 impact on Telstra is to use the $180m figure to adjust for non-recurring Covid-19 effects over FY2021.
Over FY2020 Telstra added a special one off Covid-19 bad debt calculations allowance of $36m (AR2020 p29)
I have reversed both thsoftwaree FY2020 and FY2021 Covid-19 adjustments.
Bush Fire relief and bad retail practice compensation][
Over FY2020 Telstra set aside $44m to contribute to bush fire relief and $50m to cover mis-selling by third party agents, inappropriate mobile contracts to indigenous people. I have reversed both of these making a total adjustment of $94m. Add to this figure the Covid-19 adjustment for FY2020 of $36m and the total category adjustment amounts to $130m for FY2020.
8/
Strategic Focus T22 Program
On 29th June 2018, Telstra announced their T22 strategy: to simplify both operations and the company's product set, improve customer experience and reduce the company cost base. These changes are well over and above what would be considered as 'run of the mill' restructuring. Costs incurred are in excess of 'business as usual' redundancies for the period and are recorded as follows: FY2019 $801m, FY2020 $259m, FY2021 $211m and FY2022 $71m.
9/
Lease accounting policy adjustment
IFRS16, called AASB16 in Australia, requires that leases become capitalised 'right to occupy' assets that are then depreciated over time. This reporting rule change was brought in for FY2020 and onwards reporting. I have reversed out this reporting change so that profits from FY2020 onwards are more comparable with previous years. This change has resulted in NPBT decreasing by $133m (FY2020) and $103m (FY2021) but increasing by $32m over FY2022 (for detailed calculations refer post 26).
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Conclusion: Two years down, but only one allowed. FAIL TEST