TLS

[Snoopy]

Telstra has entered a long term agreement, "the DA" (definitive agreement), to sell over many years their own legacy copper network, and some older tech fibre, to 'nbn', the state owned national broadband network in Australia. These network asset sales are being booked as 'other' profit, with most of the proceeds being paid out to shareholders as dividends as the 'profits' come through.
"our commitment to return in the order of 75% of the net one off nbn receipts to shareholders via fully franked special dividends to the end of FY2022." (AR2022 p21)

However this process has come to an end.
"The FY22 special dividend will be the final special dividend linked to one off nbn receipts." (AR2022 p21)

It seems incredulous to me that the Telstra board are raising dividends well in excess of underlying earnings, yet are somehow able to keep the dividend fully franked.

I am going on the snoop to see if I can understand where all of Telstra's franking credits came from.

	Net Profit Before Tax {A}	Tax {B}	Calculated Tax Rate {B}/{A}	Tax (Under)/Over Provision in prior years {C}	Calculated Tax Rate {B-C}/{A}
FY2018	$5,102	$1,573m	30.8%	($3m)	30.9%
FY2019	$3,072m	$923m	30.0%	$10m	29.7%
FY2020	$2,796m	$957m	34.2%	$7m	34.0%
FY2021	$2,441m	$539m	22.1%	($12m)	22.6%
FY2022	$2,481m	$867m	34.9%	$7m	34.7%

The statutory company tax rate in Australia is 30%. Telstra does have some outside of Australia business interests, as equity investments (AR2022 p154). These are largely joint venture intercontinental cable connection companies, often domiciled on tax havens: Reach Limited (Bermuuda), Australia-Japan Cable Holdings Limited (Bermuda), Dacom Crossing Corporation (Korea), Pacific Carriage Holdings Limited Inc. (United States), and Southern Cross Cable Holdings Limited (Bermuda). Over the years these have generally been very poor investments, which in the case of Reach and Australia Japan cable no longer even meet the profitability criteria to require equity accounting. The loss in total comprehensive income for those residual accountable entities over FY2022 was $203m (AR2022 p166), around 10% of Telstra NPAT. If anything these overseas operations should be decreasing the average tax paid across the company.

The tax rate figure that immediately stands out is from FY2021 with a tax rate of only 22.1%. The tax notes on p101 of AR2021 has an explanation.

i/ There is a "non-assessable $200m gain and a $101m net deferred tax asset recognised on property disposals."
ii/ "derecognition of $27m of deferred tax liability on the disposal of Sunshine NewCo Pty Ltd."

I don't understand how you could have a 'deferred tax asset' on property you have sold for a profit. I would have thought that once the property was sold, any accompanying tax bill would be immediately incurred in that year of disposal. However, what that note i/ seems to be saying is that $101m in tax liability has been 'recognised' in the future, even though the sale of the building was tax free? Baffling!

A 'tax asset' is a tax bill paid in advance. A 'deferred tax asset' represents a tax bill that is paid in advance - but- because the real tax bill is not yet due (probably due to timing differences between the company tax year and the inland revenue department tax year), is money set aside for a tax bill not yet incurred. (I hope my definitions are right there - please someone correct me if I have screwed up).

So taking these corrections into account, the underlying tax rate for FY2021 was: ($539m+$101m -$27m) / ($2,441m - $200m) = 27.4%

That is closer to the statutory tax rate of 30% that I would expect.

The net result of this exercise over the five years I looked at, is that Telstra are paying more tax than I would have expected (an average of 31.3% over five years). That explains why they have been able to pay fully franked dividends from what I had seen as a series of 'one off profits'. Those 'one off taxable profits' must include, and are largely composed of, the payments received from nbn to gradually 'hand over' Telstra's own legacy fixed network to nbn. From handover, much of the legacy network is being shut down, as fibre replaces copper. I have trouble conceptualising that as a 'value adding' transaction that should be taxable. I think of it more as a compensatory payment to Telstra for losing what was once their biggest asset - their fixed network. Nevertheless, I must surmise that the Australian government has deemed such compensation taxable, even if I think that is an odd way of looking at the situation.

SNOOPY

[Snoopy]

Not being a super internet tech, I found the following article of NBN (the Australian equivalent of Chorus) very useful.

https://infinititelecommunications.c...iness-pricing/

It explains how some internet providers can charge less for what is ostensibly the same service (when in fact it isn't). It is useful to know how a third party ISP has to pay both Access Charges on each customer line (the AVC or 'Access Virtual Circuit' charge), but also a 'maximum bandwidth for all customers' charge (the 'CVC' or 'Connectivity Virtual Circuit ' charge). Personally I have only ever bought internet from a 'retail customer perspective', where AVC and CVC are non-negotiable. But I did find the article an interesting insight as to how ISP pricing works. Old hat to some of the techies here I guess, but I found it a worthwhile read nevertheless.

The article is specifically relating to NBN, the wholesale Australian fibre network. But I guess the same principles apply to the Chorus business in New Zealand. Anyone know for sure?

SNOOPY

[peat]

I bought TLS.NZ in 2016 and watched it fall precipitously for two years, paying good dividends initially but then not so much. It has been a very poor investment - probably total returns are now back to about break even - but considering opportunity cost during that period, disastrous. They converted to TLS.AU a couple of years ago and I've continued to build the Australian porfolio since then. Ironically they sit in a good profit in the Oz portfolio because of the (paper ) loss doing the transaction to convert them.

Back at the time of purchase I thought they were doing a great deal with NBN but the market clearly thought differently. They've been working the business reasonably well in the last few years I believe trying to get the big ship moving and I think their big trick now is to sell part of the towers out or at least get others to invest in those towers which is kind of like selling to lease as I see it, and looks good in the short term.

Its now become a core portfolio stock for me - or a bottom drawer if you like ;+) - but I stopped taking shares as dividends and sold those I'd received as to reduce my exposure somewhat.
From a charting perspective would appear to be recovering from a double bottom over 2018 and 2020

[Snoopy]

I bought TLS.NZ in 2016 and watched it fall precipitously for two years, paying good dividends initially but then not so much. It has been a very poor investment - probably total returns are now back to about break even - but considering opportunity cost during that period, disastrous. They converted to TLS.AU a couple of years ago and I've continued to build the Australian portfolio since then. Ironically they sit in a good profit in the Oz portfolio because of the (paper ) loss doing the transaction to convert them.

My own 'love affair' with Telstra has been just as sad and longer. I have been there since right at the beginning, (the first float) when I bought a few what were then 'installment receipts' in November 1997 for $A2.75. I remember at he time thinking how very sophisticated I was buying into these 'Australian' shares (albeit via the NZX in the day). The installment receipt was sold as a yield story. Putting only a down-payment on the capital, while taking the full dividend made the yield look good. The second installment in October 1998 cost $A1.40 per share. That means the total price I paid for those original shares was $A4.15, twenty five years ago!

I was a 'sucker for punishment' and latched onto the second installment receipt offer, dubbed 'T2' in in October 1999. Paid $A4.75 for the installment receipt, and another $A3.05 to covert those to head shares in October 2020. Total cost of those shares: $A7.80. While this was playing out, I must have been dismayed at how far my T2 installment receipts had fallen. So I bought a few more on market at $A2.77, which added up to a package top up price of $A5.82 once the second installment was paid up on those.

Not satisfied with this, I was into the 'T3' installment receipt offer too in November 2006, and bought in at $A2.10. The second installment payment was in June 2008 at $A1.60 per share. So total price paid for those was $A3.70, which lowered my average buy in price at least.

I briefly joined the DRP in September 2007 (bought shares at $4.33) and March 2008 (bought shares at $4.27). IIRC this was the time one could 'save tax' by getting into the DRP, With hindsight I would have been better off paying the tax and investing the net proceeds elsewhere.

My final bite at the cherry was in August 2011, when I bought some shares on market at $A3.00. Not long after that the rumbles about 'splitting off the monopoly network assets' started.

My bites at the Telstra cherry were not equal in size. Dollar cost averaging my purchases and my average share purchase price comes out at $A4.36. The shares closed on the ASX at $A4.33 on Friday, so I have lost capital .

I am struggling to remember what my strategy was. That early 2000s time was the dot.com bubble. I didn't buy into that dot,com madness directly (thank goodness). But I think that my thoughts were that I would benefit indirectly by shifting some capital into telecommunications shares, TLS and TEL (as it was at the time), as internet traffic went crazy. Looking back -with hindsight- at how stupid I was, I guess I am lucky to come out with my telecommunications capital (mostly) intact (let's not mention inflation shall we!?!). And I have had a few good Telstra dividends along the way, it must be said.

SNOOPY

[Snoopy]

Back at the time of purchase I thought they were doing a great deal with NBN but the market clearly thought differently. They've been working the business reasonably well in the last few years I believe trying to get the big ship moving and I think their big trick now is to sell part of the towers out or at least get others to invest in those towers which is kind of like selling to lease as I see it, and looks good in the short term.

Its now become a core portfolio stock for me - or a bottom drawer if you like ;+)

My own thoughts on the NBN 'roll out / transfer' was that it was just too complex for me to understand the risks and, being in Oz, too far away to get that 'on the ground' knowledge of what the end result was going to be. That is why my own TLS shares went 'in the bottom drawer' for ten years. TLS was never one of my bigger investments and I didn't think Telstra was at risk of going broke. So best to 'let it be' and invest my 'investment analyst time' elsewhere.

So why am I suddenly taking an interest in TLS again, after all this time? The main reason is that I see Telstra as a 'reference share', with which I can compare my Spark investment (one of my larger holdings). Now that the NBN roll out is effectively complete (from a Telstra perspective anyway), Spark and Telstra are closely comparable again. I am not anticipating ramping up my investment in Telstra, although to be fair my detailed financial catch up on Telstra is far from complete. But I feel that by better understanding Telstra, this will give me a new perspective on understanding Spark.

If anyone out there thinks I am a 'telecommunications guru' that is about to recommend piling into Telstra then I am sad to report I am not and have no immediate investment intent to acquire any more Telstra shares myself. But stay tuned, and we will see what comes out 'in the wash' (my post 18 on this thread that I am gradually updating; Added finally finished on 1st June).

SNOOPY

P.S. Peat for your information those Telstra mobile towers have been 49% sold off as of 1st September 2021 to pension funds. From AR2022 p2
"The sale of a non-controlling interest in the Amplitel tower business (raised) $A2.8billion."

So the sale and lease back you talk about has already happened.

[Snoopy]

Telstra adopted AASB16 for the FY2020 accounting year. Telstra have chosen to use the 'modified retrospective adoption approach' (AR2020 p88). This means the comparative results for FY2019 have not been restated, Instead the balance sheet was adjusted, in terms of listing the quantum of retained earnings as at 01/07/2019 (the start of FY2020) to mirror the cumulative effect of historically applying this standard. To compare the results from FY2018 and FY2019 with newer results, we can adjust the newer results to reflect what would have been reported if AASB16 had never been adopted as the reporting rule going forwards.

At this point I need to remind readers that the total profit over the years, booked by Telstra from utilising a leased asset (like a rental premises) is not changed by accounting reporting rules. Instead the effect of AASB16 is to shift profitability between reporting years, not to change the 'all of contract' leasing profitability picture.

An increase in expenses from adopting AASB16 for a selected year, will result in a decrease in profit for that year.

	Expense	FY2020	FY2021	FY2022		Reference
Post AASB16	Depreciation of right-of-use assets	$1,017m	$726m	$587m		(AR Note 2.3 'Expenses')
	add Interest on lease liabilities	$109m	$83m	$78m		(AR Note 2.3 'Expenses')
		$1,126m	$809m	$665m		(Total)
Pre AASB16 (based on Cashflow)	less Lease Finance Payments (principal portion)	($993m)	($706m)	($697m)		(AR 'Statement of Cashflows')
	NPBT Profit Increment on adopting AASB16	($133m)	($103m)	$32m		(Total)

SNOOPY

[peat]

P.S. Peat for your information those Telstra mobile towers have been 49% sold off as of 1st September 2021 to pension funds. From AR2022 p2
"The sale of a non-controlling interest in the Amplitel tower business (raised) $A2.8billion."

So the sale and lease back you talk about has already happened.

Thanks for the update Snoopy
I dont really manage to keep up with things so well, now that I am working again.

[Snoopy]

The following ROE analysis was done using equity on the books at the end of the respective financial year. This will reflect the fact that 'network assets' signed over to nbn in that year will have been removed from the balance sheet. My profit normalisation process has removed any profits from the handover of these assets. That means using an 'equity asset base' without the removed assets on the books is, in my view, the most appropriate way to handle this calculation.


FY2022: $1,643m / $16,837m= 9.76%

FY2021: $1,445m / $15,275m= 9.46%

FY2020: $1,050m / $15,147m = 6.93%

FY2019: $1,494m / $14,530m = 10.3%

FY2018: $1,645m / $15,014m = 11.0%

Conclusion: Our return on equity hurdle was never cleared! FAIL TEST

SNOOPY

[Snoopy]

With Australia's inflation surging to 6.1% in the June 2022 year, this particular test has taken on a new poignancy.

I have removed the profit resulting from the sale/transfer of assets to nbn. It follows then, that I should also remove the revenue from these transactions as well. See post 20 for the calculation of revenues involved in these transactions.


FY2022: $1,643m / ($22,045m - $378m) = 7.58%

FY2021: $1,445m / ($23,132m - $1,050m) = 6.54%

FY2020: $1,050m / ($23,710m - $2,004m) = 4.84%

FY2019: $1,494m / ($25,259m- $2,116m) = 6.46%

FY2018: $1,645m / ($25,848m - $2,297m)= 6.98%

Conclusion: Despite the noticeable fall in profit margins over the FY2018 to FY2020 period, the profit margins have subsequently bounced back. That shows growth in profit margins is possible in this tough and competitive telecommunications market. PASS TEST

SNOOPY

P.S. Note that a margin increasing by more than 6.1% from FY2021, would require the margin in the subsequent year to rise to: 6.54%x1.061=6.94%. The actual margin over FY2022 was 7.58%, which beats the 6.94% hurdle.

[Snoopy]

Often the exercise of 'normalising profits' consists of adding a tweak here and there. Some may question if the extra time spent doing that is worthwhile, and rightly so. However in the case of Telstra, of which it must be said the 'normalising process' took an inordinate amount of extra reading and time to adjust, the normalising of profits produced changes in results that were particularly striking. The details of the normalising calculations may be found in post 18.
.

Year	Declared Profit	Normalised Profit
FY2022	$1,814m	$1,643m
FY2021	$1,902m	$1,445m
FY2020	$1,839m	$1,050m
FY2019	$2,149m	$1,494m
FY2018	$3,557m	$1,645m

The declared profit shows, with one exception a straight line down. The normalised profit shows something quite different - a dip and a bounce back. Likewise the Return on Equity picture, a measure of how efficiently the company is using shareholder funds, changes somewhat as profits are normalised.

Year	Declared ROE	Normalised ROE
FY2022	$1,814m/$16,837m=10.8%	10.9%
FY2021	$1,902m/$15,275m=12.5%	9.94%
FY2020	$1,839m/$15,147m=12.1%	6.93%
FY2019	$2,149m/$14,530m=14.8%	9.78%
FY2018	$3,557m/$15,014m=23.7%	9.77%

The declared picture shows the ROE plummeting from a figure that looks very healthy to something quite ordinary as it gets worse, The normalised figure, while lower overall, is projecting a much steadier picture, albeit locked in an overall lower ROE band.

While some here tout the benefits of sophisticated robotic harvesting of results for fast and wide high tech result processing, I think there is still a space for the old fashioned 'line by line' reading of how those headline profit figures are actually derived.

SNOOPY