TEL v TLS

[Snoopy]

This thread has been dormant for 10 years, but time to fire it up again. The thread title should now be SPK vs TLS. But I hope Vince will sort that out when he returns from hibernation. A lot has happened in 10 years. But after growing apart with what was TEL shedding their fixed network arm Chorus twelve years ago, TLS has (finally) followed with their own fixed line network going to nbn, with the associated transfer payments now rounding down. Now we are left with what were the two former incumbents, still the largest telecommunications retailers in their respective countries. I feel a comparative stand off coming on.....

The population figures I have for both countries as of 2022 were 5,185,288 (New Zealand) and 26,124,814 (Australia). That is a ratio of 5.0:1 in favour of Australia. I have added a row to the table to normalise for this population mismatch where appropriate by dividing the TLS figure by 5.

	Spark (SPK)	Telstra (TLS)	Telstra (TLS) (population normalised)
Operational Sector	Telecommunications	Telecommunications
Total Employees	4,976	28,889	5,778
Geographic Market(s)	New Zealand	Australia
Share Price 15-05-2023	$NZ5.22	$A4.35
Market Capitalisation 15-05-2023	$NZ9.732b	$A49.92b	$A9.984b
Capitalised Dividend Valuation per share (2019 to 2023)	$NZ5.24	$A3.09
Declared earnings (FY2022)	$NZ410m	$A1,814m	$A363m
Normalised earnings (FY2022)	$NZ397m	$A1,643m	$A329m
Normalised eps (FY2022)	NZ20.9c	A14.2c
Normalised eps growth over 4 year period (FY2018 to FY2022)	+7.18%	+2.90%
Historical PER (SP@15-05-2023)(FY2022)	25.1	30.6
dps (paid during FY2022)	NZ12.5c+NZ12.5c	A5c+A6c
Earnings Payout Ratio (excluding DRP)	120%	77.5%
Gross dps (paid during FY2022)	NZ17.36c+NZ17.36c	A7.14c+A8.57c
Historical Gross Dividend Yield (using Share Price 15-05-2023)	6.63%	3.61%
Shareholder Equity (based on equity at EOFY2022)	$1,475m	$A16,837m	$A3,367m
ROE (based on equity at EOFY2022)	26.9%	9.77%
Sales (FY2022)	$3,720m	$A16,837m	$A3,367m
Net Profit Margin (FY2022)	10.7%	6.98%
Total Drawn Term Debt (last balance date EOFY2022)	$1,526m	$A10,982m	$A2,196m
MDRT (Based on Drawn Term Debt at balance date EOFY2023)	3.84 years	6.05 years

At this point I was planning to have a short summary on the relative merit and demerit points of investing into Spark and Telstra. But going through the comparative columns line by line, it is apparent that Spark is outperforming Telstra in all measures. There is nothing we can learn from the Aussies, and there appears to be everything they can learn from us!

Operational metrics show how a company is performing. But for investors, the key statistic to look for is the value you get for the price you pay. Looking at both through a 'no growth' capitalised dividend lens, you would be buying SPK as a no growth prospect on the market today at fair value. OTOH the premium you are paying for TLS ($A4.35 / $A3.09 = +40%) indicates a lot of forward growth is already built into the share price.

It is rare that such a comprehensive comparison is as one sided as this. Buy Spark on share price weakness and sell TLS into any share price rally looks to be the message this table is telling us.

discl: hold SPK and TLS, but a lot more of the former.

Another year, another head to head contest. The thread title should now be SPK vs TLS. Vince is still on his cryogenic break by the look of it, so the thread title remains frozen. The two former telecommunications incumbents, still the largest telecommunications retailers in their respective countries, face off.....

The population figures I have for both countries as of 2022 were 5,185,288 (New Zealand) and 26,124,814 (Australia). That is a ratio of 5.0:1 in favour of Australia. Table column 3 normalises figures for this population mismatch where appropriate by dividing the TLS figure by 5.

	Spark (SPK)	Telstra (TLS)	Telstra (TLS) (population normalised)
Operational Sector	Telecommunications	Telecommunications
Total Employees	5,432	31,761	6,352
Geographic Market(s)	New Zealand	Australia
Share Price 18-10-2023	$NZ4.99	$A3.87
Market Capitalisation 18-10-2023	$NZ9.206b	$A44.71b	$A8.943b
Capitalised Dividend Valuation per share (2019.5 to 2023.5)	$NZ5.32	$A3.15
Declared earnings (FY2023)	$NZ449m	$A2,051m	$A410m
Normalised earnings (FY2023)	$NZ425m	$A2,128m	$A426m
Normalised eps (FY2023)	NZ23.0c	A18.4c
Normalised eps growth over 4 year period (FY2019 to FY2023)	+5.99%	+52.1%
Historical PER (SP@18-10-2023)(FY2023)	23.1	21.0
dps (paid during FY2023)	NZ12.5c+NZ13.5c	A7.5c+A8.5c
Earnings Payout Ratio (excluding DRP)	113%	76.2%
Gross dps (paid during FY2023)	NZ17.36c+NZ18.75c	A10.71c+A12.14c
Historical Gross Dividend Yield (using Share Price 15-10-2023)	7.24%	5.90%
Shareholder Equity (based on equity at EOFY2023)	$1,940m	$A17,816m	$A3,563m
ROE (based on equity at EOFY2023)	21.9%	11.9%
Sales (FY2023)	$3,875m	$A23,173m	$A4,635m
Net Profit Margin (FY2023)	11.0%	9.18%
Total Drawn Term Debt (last balance date EOFY2023)	$1,052m	$A12,675m	$A2,535m
MDRT (Based on Drawn Term Debt at balance date EOFY2023)	2.48 years	5.96 years

Discussion

In an industry renowned for cost cutting, I was surprised to see the workforce of each protagonist grow by around 10% over FY2023. In the case of Spark, this was primarily explained by an in-sourcing of field services, no doubt assisted by growth in the company's contracting arm Entelar (which includes the old Connect 8). Added to that was an increase in staff at subsidiary MATTR. MATTR is the 'exciting' standalone Spark subsidiary company. It provides infrastructure for verifiable data and digital trust. MATTR operates over a Software as a Service (SaaS) Platform. Meanwhile over FY2023 Telstra expanded into new markets, acquiring Digicel Pacific (1700 employees). Furthermore Telstra recalled outsourced overseas call centre jobs back to Australia, resulting in what were indirect contract jobs being returned to full time employment status. Finally organic growth in the 'Telstra Purple': professional services, managed services and cloud would have been a sure bet to add to the head count in that specialist division.

There are differences worth mentioning. But my overall impression is how similar our two protagonists are from an investment perspective on those raw table numbers. Telstra is much bigger, courtesy of the much bigger country in which it operates. But when you scale some of those figures by 5, to take account of the relative population size of Australia verses NZ, the similarities become more obvious. In the case of normalised earnings, almost spookily so: $425m vs $426m in their respective currencies!

In a reversal from last year, it is now Spark that trades on the higher PE ratio, possibly supported by the higher dividend yield on offer. The return on shareholder equity continues to be significantly higher at Spark as well. This could be due to the vast size of Australia, with more equipment needed to connect a more thinly spread population. It could also be due to the 'not inexpensive to set up' Telstra Purple division, synonymous with highly paid 'computer techs' which have been added to with acquisitions like 'Power Health' and 'Medical Director'. These two acquisitions cost over half a billion dollars for the pair in FY2022. but actual profits from these ventures for their part in the 'Telstra must be present' market space of 'Telstra Purple' are signalled to be years away. Spark, by contrast, have much more modest ambitions in their own in house software space, preferring to sell solutions developed by others. That means more money in the pockets of Spark shareholders today, but losing the opportunity cost of one or more of these big software projects 'coming right' in future years (with the exception of MATTR). Returning to Telstra, I think there is $800m worth of revenue within the 'Telstra Enterprise' 'business unit envelope', NAS applications in particular, which is loss making. A quick 'rule of thumb' on valuing such software assets is to 'value them at a multiple revenue'. A multiple of 5 has some historical precedence, albeit this is a 'rough measure' as it doesn't individually consider:

● Annual Recurring Revenue (business size)
● Growth rate (momentum)
● Net revenue retention (product quality)
● Gross margin (profitability)

By this measure, $800m in revenue equates to: 5x$800m/11,554m= 35cps

Operational metrics show how a company is performing. But for investors, the key statistic to look for is the value you get for the price you pay. Looking at both through a 'no growth' capitalised dividend lens, you would be buying SPK as the better no growth prospect on the market today at fair value. OTOH the premium you are paying for TLS ($A3.87 / $A3.15 = +23%, or 72cps) indicates a lot of forward growth is already built into the share price. But looking at the cumulative four year normalised growth rate at Telstra over over 50%, verses just over 5% at Spark, is this evidence that the Telstra growth premium really is justified?

Comparing the 'product performance' disclosures at Telstra in AR2019 and AR2023, indicates from where this improved profit growth has come from. The EBITDA margin expanding from 34% to 44.9% at the largest product grouping mobile has helped. But the big change has been at the InfraCo business unit, a business unit that wasn't even recognised as such in AR2019. Back then 'infrastructure' was simply regarded as a 'necessary cost'. InfraCo and the associated mobile tower company Amplitel, combined now represent more that 10% of Telstra's total revenue. And what is more they now have by far the highest EBITDA margins of 65.1% and 79.3% respectively of any business unit. But most of their 'customers' are other divisions of Telstra. That means the day to day operational parts of Telstra are operating with a much higher input cost base in FY2023 than in FY2019. Yet still the EBITDA profit margins in those other product groupings are steady or increasing on what some would say are 'artificially increased input costs'. What a brilliant way to ramp up profitability across all the front line divisions without appearing to be too greedy! Corporatising a cost centre like Infraco was a brilliant accounting trick. But it is an ace that once played, cannot be played again. So I would not read too much in to that spectacular normalised growth figure at Telstra over four years of 52.1%.

SNOOPY

discl: hold SPK and TLS, but a lot more of the former