TLS

[Snoopy]

I need to make a formal apology. That post I made yesterday above on this Telstra thread? I think it was one of the worst posts I have ever read on Sharetrader. It was long rambling, boring and repetitive. I couldn't even read it through straight myself without taking a break in the middle. And I am the author! My only excuse is that it was basically a text dump from analyst question time. So I do put a little blame on the analysts for being so repetitive and unimaginative with their questions. Here is my summary for those that didn't read the referred to post (which I guess is almost all of you).

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Network, Application & Services Business Unit

A sub section of the 'Fixed -Enterprise' i.e. government and business, market 'NAS' has suffered a notable fall in profitability. But we have to remember that total Telstra revenue for FY2023 was $23.245 billion while total NAS revenue at $2.834billion represented only just over 12% of that total. Part of the problem is that 'legacy voice revenue' has been thrown into the NAS total. As legacy voice revenue is in perpetual decline, it kind of tarnishes the NAS 'bucket' with a negative vibe as each year starts.

But smart software applications supplied my Telstra do have a future, in particular around the core functions of 'security' and functionality and integration 'with the cloud', and even help integrating AI where Telstra has some internal experience. Big projects have really stalled. But this is a response to macroeconomic headwinds and is not a signal that Telstra should leave that business space, or that competitors are taking market share. Not all growth will be organic. Some will be by acquisition e.g Versent, a Melbourne based company that provides expertise across cloud, security, data, digital, and identity and access management. The acquisition also includes Versent subsidiary Stax, which provides an AWS cloud self-management platform.

Telstra is committed to NAS cost cutting but it would be bad faith with the workforce right now to spell that out in job cuts. Yet if there are not enough sackings, and there will be an adjustment on the work capability side, there will certainly be slashings in other budget areas to meet those cost cutting targets.

Don't fret about NAS. We are coming back!

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SNOOPY

[Snoopy]

Number two on the investment list is the vast inter capital ultra fast (400Gbps) fibre super highway that Telstra is building between Adelaide, Melbourne, Canberra, Sydney and Brisbane. Apparently customers 'Amazon AWS' and 'Microsoft Azure' hyper data providers are excited. Telstra seems excited, as this is apparently the first such upgrade for twenty years. But do you forgive me as a Telstra shareholder for being less than excited? Somehow I can't see Amazon or Microsoft bubbling over to pay Telstra a great return on this investment we are making. Nevertheless I believe that connecting those capital cities in this way and reaping the rewards, whatever they may be, was a prime reason why InfrCo was retained within Telstra, and not sold off. Growth is not expected from this investment until FY2026, when the whole upgraded capital city inter-connectedness comes on line.

How much is this inter-capital super cyber highway going to cost? PR2023 p7 suggests an annual spend of $300m will cover the build out of intercity fibre and Viasat development projects (Viasat spending from a Telstra perspective represents the 'Australian based ground stations' for an Asia Pacific satellite constellation - Telstra has no equity interest in the Viasat satellites themselves). Let's assume 90% of this budgeted spend over 3 years is towards the UFB FSH. That comes out as an investment of: 0.9 x 3 x $300m = $810m. The InfraCo EBITDA margin was listed at 66.1% over FY2023 (AR2023 p23). That would imply an annual EBITDA contribution of: $810m x 0.661 = $535m from this investment. Let's say half of that in reality - $220m - as I am sure those US based big boys will screw Telstra down on price. Total Telstra EBITDA for FY2023 was $7,862m. So we are looking at a $220m/$7,862m= a 2.8% rise in EBITDA. Useful. But I can't get too excited about that,

Questions answered on this topic from the analyst HY2024 conference call:


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Q1/ Roger Samuel/ There has been a lot of press around new investment in subsea cable systems. The first part of the question is can you tell us what sort of rate of return do you expect from these investments? And whether you need to upgrade the older cable systems that you’ve got? And you may require some more strategic capex investments on top of your intercity fibre network?

A1a/ Vicki Brady (CEO)/ In capex, and you mentioned undersea cable investments. I mean, it's a little bit like what we’re seeing here in Australia in terms of the build-out of our intercity fibre, as we look at demand and future demand there is a lot of demand for capacity on undersea cable. And as I spoke to, we’re a significant player in APAC (Asia Pacific) when it comes to our undersea cable business.

So we assess any of those investments and have hurdle rates in place that those investments have to reach. Michael may want to comment a little bit more on that. And at the moment we’re managing that obviously inside our capex envelopes. As we look at next year and beyond, that’s one of the things we’ll work through. Because if we see good opportunities to invest where there can be good returns, as we did with intercity fibre, in that case we could see the benefit. We could see the benefit in moving quickly to build that capacity, to set the country up for the next couple of decades.

So in terms of undersea cable there are some similar structural trends there in terms of that growth in demand. And as you’ve seen, we do partner and we do look at different arrangements to be able to make sure we can meet the needs of our customers. Just in terms of our older subsea cable systems, we have every year an amount of maintenance and upgrade spend for those systems just like you would do on a fixed infrastructure. In terms of fibre you do 'do maintenance', you do 'do upgrades' to electronics to make sure you’ve got capacity growing to be able to meet the needs of our customers. So that’s the ordinary course and that sits inside our business-as-usual capex.

A1b/ Michael Ackland (CFO)/ "I think just on the subsea business, those same trends that are driving the demand for intercity fibre are driving demand in subsea. And as we talked about earlier this year, we have invested in an additional around $100 million in new growth investment as part of our BAU (Business as Usual) capex, as Vicki pointed out. One of those is a new Singapore/US route, which will come online in Q3 this year for customers ready for service, and a Taiwan/Korea route that’ll come online into Q4. And in terms of how we think about those investments, we do look at them in a similar way as we would with intercity fibre."

"We’ve always talked about cash and IRRs, and hurdle rates. And we’ll have a risk adjusted view of that, which will be different risks for different routes, and in the same way as we look at intercity fibre. So we think there is a lot of opportunity there, and we are incredibly well positioned in very specific routes, particularly intra-Asia for us, and trans-Pacific."



Q2/ Ware Kuo/ "In relation to InfraCo and intercity fibre, and you’ve called out increased confidence around the IRRs from the project. Is there any risk of potential fibre overbuild for long haul that we see in residential, and if there is, how do you mitigate against that risk?"

A2/ Brendon Riley (CEO, Telstra InfraCo) / "I was in the US just a few weeks ago at the PTC (Pacific Telecom's Council conference), which is probably the biggest digital infrastructure event in the world. And coming out of that, one can only be very excited about what’s happening in the world of digital infrastructure, the investment, data centres, satellites, terrestrial undersea fibre. If you look at it all, then it just instills a huge amount of confidence in the project. And I think we came away from that with a great deal of renewed interest in the wonderful intercity fibre that we’re laying."

"If we look at the Australian market, I would describe it as that backhaul and the access market. The backhaul market is essentially what inner-city fibre is, it’s those big links between capital cities, between data centres, between major nbn POIs. And access fibre is obviously what connects to our homes and our businesses (includes mostly fibre run by nbn)."

"There’s definitely a lot more activity in access fibre, in terms of numbers of operators and builders. We still see very good demand for our access fibre, not only from Telstra but the rest of the industry. But there’s probably more action in that access fibre space than there is in the backhaul space which is where we’re building intercity fibre."

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I note from the HY2024 results presentation that 'core access' revenue to 'InfraCo Fixed' was up 8.2% on the corresponding previous half year period HY2023, while 'InfraCo Fixed' expenses rose 17.1% over that same period. This is one sign of InfraCo being in an 'investment phase'. Another being EBITDA only rising 3.3% concomitantly. InfraCo is the infrastructure owning arm of Telstra that doesn't own the cellphone towers (that is a separate business, Amplitel). InfraCo assets are wholesale back-haul assets like the inter city fibre highway being discussed. But also more prosaically, ducts (many rented on long term 24 year contracts to nbn, the national broadband network), and racks for housing hardware and software for others. Much of this income is long term rental contracts that have an inflation linked element. Infrastructure investment like this involves dollars up front before the income streams really kick in. So I think the best is yet too come for InfraCo which may be why, unlike what happened to Amplitel, Telstra has no immediate plans to sell down their 100% InfraCo holding.

One growth area of Infraco between reporting periods is the disposal of legacy copper assets as the old Telstra owned copper network is recycled, as the national asset restructuring plan transition to nbn fibre rolls through. Nevertheless despite a fall of 2.5% against the prior reference period, EBITDAaL (Earnings before interest, tax, depreciation and amortisation and after leases) margin for InfraCo fixed remains healthy at 60.2%. In my view, this part of the Telstra growth engine is still in the building phase and has yet to show its potential. But the outlook remains very promising.

SNOOPY

[Snoopy]

'Mobile' is number one for receipt of the proceeds of the capex shovel. Telstra seem very on the ball with 5G, and extracting new opportunities from that. This is the area of investment best understood by the public, as potential shareholders, and the rebound of revenue and EBITDA trends for mobile over the last five years tells a story.

	FY2019	FY2020	FY2021	FY2022	FY2023
Telstra Mobile Revenue	$10,084m	$10,130m	$9,310m	$9,470m	$10,258m
Telstra Mobile EBITDA margin	34%	34.7%	39.2%	42.2%	44.9%

The decline in profits over FY2021 was largely due to lower hardware sales and reduced international roaming revenue. Despite this 'mobile services revenue', the key driver of mobile profitability, increased by 3.7% (or 5.2% excluding international roaming) over 2HY2021.

Tom Beadle from Jarden asked this very pertinent question at the FY2023 results announcement;:
"With the players across the industry targeting ROIC (a previous questioner Eric Choi talked about the mobile industry as a whole having collective ROIC targets on mobile investment for the first time) , what do you think is a sustainable mid cycle ROIC?"

CEO Vicki Brady responded as follows:
"It’s pleasing to see ROIC, our underlying ROIC, get to the 8.1% in FY23, and we’re seeking to grow it out to FY25. We haven’t put any ambition out there beyond that. The thing I would say, as we all know, watching the industry closely, the industry overall has been sitting with ROICs below cost of capital. So there has obviously been a need across industry to make sure we’re delivering returns that allow us to sustain the sort of investment and deliver the high quality networks and experiences for our customers."

I did a double take when I read Vicki's reply. It sounds like that after years of undercutting each other in the mobile space, there is now a 'cartel arrangement' whereby mobile operators agree not to drop their prices below a certain level. I have a feeling that if this was NZ, the commerce commission might have something to say about that. But this is Oz......, and it looks like 'the industry' is making it stick. It does sound good for NZ based Telstra shareholders, I must admit!

The following questions relating to mobile were answered at the HYR2024 analyst question session.

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Q1/ Entcho Raykovski: / "I’ve got a question on mobile. I mean, obviously it continues to be a very good performer. I’m interested in how much of the 63,000 benefitting postpaid SIOs (Services in Operation i.e. active users) was due to the Optus outage? I don’t know if you can quantify that, but it would be helpful. And whether you’ve seen that benefit continue into the second half or whether it’s a one off? And now that you’ve had the opportunity to digest the impact, how do you see the outage as impacting the competitive dynamics in mobile? I think that’s an area that people have been thinking about when it comes to the mobile market."

A1/ Vicki Brady (CEO) / "In terms of mobile, as you point out it was a good half in terms of postpaid handheld net adds at 63,000. In terms of the impact of the Optus outage I would characterise its impact as similar to the prior event."

"So we’ve seen net SIO impact we would estimate maybe in the tens of thousands. To be honest we had a very good particularly December quarter in terms of postpaid handheld net adds, and I’m sure Brad will offer some good colour to what’s been going on there."

"In terms of the competitive dynamic, the thing I think it’s really triggered for customers is it’s brought front of mind for them it’s about real resilience and reliability. So we know we’re all reliant on connectivity, whether it’s in our personal lives or in our businesses. But I think that’s definitely brought it front of mind and that’s really opened up that conversation with customers. And as you can see, very good overall mobile customer growth right across postpaid, prepaid and our MVNO (Mobile Virtual Network Operator) wholesale business as well in the half."

A2/ Brad Whitcombe (Group Executive, Consumer and Small Business) / "I might put the subscriber numbers and the Optus impact in a broader context. So as a reminder, back in May we had communicated to our postpaid handheld customers that we were making some price changes, those changes going into effect in July. And as expected we did see a small uptick in churn at that point. We also saw a suppression in acquisitions as customers were looking at, “what does that mean to us?”

"And also during that May to July time-frame we did do dual quoting, so very transparent with potential new customers to say, “This is what you’d be paying now, but it would be changing around the July time-frame.” Given that that was the second time that we had executed that annual review, I’d say our customer communications were even better. The execution of front line was very, very strong. In particular, communicating with customers what it meant to them and potentially other plans they could move to or other products, et cetera. And we did then see the acquisition engine spin back up."

"We saw the churn normalise. In fact, if you look over the first half of the year I think we came in at less than 1% per month churn, around 11.5% annualised. And we took a lot of comfort in that, that the value proposition that we’re bringing to our customers is the right one. And that’s really built off of an exceptional network and a very reliable network, the cyber security benefits that we provide to our customers, having an onshore contact centre when people need support, and importantly also having retail stores, which we own and control. They’re our employees, and that’s a great point for service differentiation."

"If we look at the Optus outage specifically, you would have seen in the press the day of, obviously there was quite a lot of foot traffic in store as people were trying to get connected on the day. We did see that, as Vicki mentioned, the conversation around the importance of reliability play out both with existing customers and potential new customers. So again, that would have helped with our acquisition during that period of time. But it gets hard to unpick, because shortly after that we had what I think was a really, really impressive “Hello, Christmas” campaign, which was fully integrated both at the top line branding and also directly into the stores. "

"So if I were to ask the store teams they would say that ongoing strength of performance has much more to do with our value proposition and the way it was communicated in that campaign than, as Vicki said, a minor uptick from the Optus outage."




Q2/ Darren Leung / "On the conversation of mobile I just wanted to follow on that point. There’s a lot of adds (this means added subscribers) in wholesale and prepaid SIOs. Has there been an element of this that has been driven by the Optus outage? And has any of that churned off over the last few months, or do you expect it to be quite sticky?"

"In relation to postpaid churn, and I know there’s a lot of moving parts in this half. But it looks particularly low in the context of a price increase when one of your major peers did not. So I guess my question is, is it low enough at a level that you feel confident to start lifting price even if your peers do not?"

A2a/ Vicki Brady / "In terms of the overall net subscriber growth that you can see in the half; so when you put postpaid, prepaid, wholesale together, a little over 340,000 net additions. Look, I would put quite a bit of that down to, particularly prepaid and wholesale."

"We’ve seen growth in population and there’s no doubt our multi brand approach gives customers real choice around what’s the right service and proposition for them. And so I think we’ve seen the benefit of our multi-brand approach really giving customers choice."

A2b/ Brendon Riley (CEO Telstra InfraCo) / "On wholesale prepaid following the Optus outage we did see a healthy spike. There was some rollback, probably 30% to 40% rolled back. But it was definitely accretive to the prepaid business. And I think in line with comments that Vicki made, it’s not massive, but it was definitely accretive and helpful."

A2c/ Brad Whitcombe (Group executive, Consumer and Small Business) / "If I pick up on the churn point. Obviously we’d like churn to be lower, but 11.5% is normalised if you take out exceptionally low churn during the COVID period. So we are comfortable with that level of churn, although always trying to bring it down. I think on the multi-brand strategy too, if you look across our entire portfolio, so whether that’s retail, wholesale, whether you look at it from postpaid, prepaid, whether you look at it from name brand or all of our other sub-brands, during the half we were able to increase net subscribers and also increase ARPU during that time."

"So I think that shows the power of the multi-brand strategy. In terms of our competitive position, I think the focus on our value proposition, what we’re delivering to customers, which I talked about. The network, the on shore customer support, et cetera. It feels like that’s really resonating, and that’s something that we’re going to continue to invest in."




Q3/ Lucy Huang / "Subs in mobiles. Just putting all the comments together can I just confirm that it sounds like that run rate in net adds has still roughly continued in the first part of third quarter this year? "

A3/ Vicki Brady / "So as Brad spoke to in quite a bit of detail, we saw a really pleasing period, particularly that December quarter. Obviously mobile subs is cyclical and the Christmas period is usually a good period for us. I think my comment would be we remain pleased with what we’re seeing currently. But again, I would just call out it is always cyclical in terms of our mobile business and subscriber acquisition. But as Brad talked about, I think some great execution from the teams really pulling through our brand and our marketing through to our stores and it’s been good to see that."




Q4/ Tom Beadle / "Mobile momentum is quite good and postpaid ARPU is growing. So is there anything incremental to think about here on postpaid ARPU or should it be fairly flat, half on half?"

"The external environment is putting pressure on consumers. I guess the question is how much might this be impacting the relative performance of prepaid and wholesale just given their obvious price points? And have you seen any evidence of customers spinning down from postpaid? And is it fair to say that maybe that Optus outage could have helped prop up postpaid growth in that context?"

A4/ Vicki Brady / "Just on prepaid, wholesale, is what we’re seeing. As I mentioned earlier, I think as we see population growth at high levels and people entering the country, ordinarily we would expect to see people choose and go to prepaid, and maybe some of those MVNO wholesale prepaid offerings as well. So I think that’s absolutely helping us in terms of overall prepaid momentum in the market, just with population growth. In terms of what we’re seeing with consumers it’s important to recognise that for our consumers under our Telstra brand we don’t have contracts on their service. So they do have that ability to move and make choice. "

"And obviously we do have the choice of prepaid, of our various sub-brands like 'Belong' (Telstras low cost value brand), and then obviously there’s the wholesale offerings in market as well from those providers. I would say we’re still seeing from our consumers undoubtedly the importance of being connected is front of mind, and that flexibility and choice is incredibly helpful to have there. And I think we’re seeing that play out. As we spoke about, the multi-brand strategy gives us a way to address the different parts of the market. And as customers’ needs change, as their circumstances change, they have choice."





Q5/ Tom Beadle / "On mobile handsets. I realise it’s not a big area of focus, but I guess we’ve had some feedback from the retailers, like, JB Hi-Fi that Apple has been offering incentives to help shift stock. So I’d assume that you typically probably make no margin on handsets, on sales. But can you confirm if you’ve received any incentives from Apple or other manufacturers, which might have helped incrementally?"

A5/ Brad Whitcomb (Group Executive Consumer and Small Business) / "I’d say a couple of things there. One, just in terms of the sentiment. We’ve got probably stronger foot traffic in stores and we’ve seen that continue to grow. If we look at the stress of customers our bad debt percentage has actually stayed quite stable and low during that period of time. For handsets in particular though we do see a general slowdown in the volume of handsets that are being shipped in the market and we’ve also seen a slight shift away from carrier sales and straight into retailers directly."

"So what that’s resulted in Telstra is that we’ve got fewer handset sales, but at a higher value. So we’re seeing the premium end of the market moving quite well. Now, the last thing I’d add is within our numbers we’ve also got accessories and wearables, and that business is performing quite strongly as well."




Q6/ Brian Han / "On 5G can you please give us some indication as to the percentage of your mobile subs that’s now on 5G? And anything you can share in terms of differentials versus 4G in metric such as ARPU, cost per megabyte delivered and energy consumption?"

A6a/ Vicki Brady / "Just in terms of 5G, I don’t think we’ve disclosed actually a percentage of customers on 5G. But Michael might correct me on that if I’ve got that wrong. Look, the thing we are seeing as customers move and as you would be aware, when you go and buy a new phone today, a new mobile phone, the large majority are 5G capable. And so as people move to 5G, we certainly see in terms of experience you do enjoy the benefits of faster speeds, lower latency. But, I mean, ultimately what does a customer think about? I think they just think about how quickly does it work? Is it responsive? Is the capacity there? Can I use the things I want to use? And that’s what’s important about the upgrade and moving into 5G for the majority of our customers."

"And certainly as we’ve said, with each new generation of mobile technology it does get more efficient. And so for us to be able to meet the needs with data growing on the network at 30% per annum, without investing in 5G and rolling that out the costs in terms of capex and opex we would have had to spend. "

"So 5G on its own just as a business case, I know everyone looks to where are the revenue streams that are going to come on top of 5G. But actually the case for 5G was fundamentally about how do we actually serve the demand on our network in the most cost-effective way. And as I said, newer technology, each generation gets more efficient in being able to deliver that."

A6b/ Michael Ackland (CFO) / "I think we’re about 48% of traffic on 5G, which is not giving you an answer on the number of customers, but the traffic is really the driver of investment and costs, so 48%."




Q7/ Nick Basile / " On mobile EBITDA. I’m just trying to get a better understanding of the moving parts to the EBITDA growth. I think there were some comments about mobile services revenue growth versus the hardware margin being lower. I’m just interested to what extent that the postpaid revenue growth versus prepaid is also helping deliver better results in that area."

A7/ Michael Ackland / "On mobile EBITDA, if I just start with mobile service revenue growth. We’ve split out mobile service revenue growth between postpaid handheld, prepaid mobile broadband, internet of things, and wholesale. Apart from mobile broadband, we’re seeing growth across all areas. The biggest absolute growth is in postpaid handheld service revenue growth. And we did see a drop of about 3% in hardware and other income."

"But from a mobile hardware margin point of view, mobile hardware margin including Telstra Plus, that margin in absolute dollars increased. And so when we think about mobile EBITDA, it was largely driven by service revenue growth, but a significant part of it was driven by cost reduction both from hardware but also from our underlying cost-to-serve and cost-to-connect."



Q8/ Jenny Wiggins/ "Are you planning to put up prices of mobile phone plans again mid-year?"

A8/ Vicki Brady / "In terms of mobile, I mean, the business has performed well. It’s obviously not appropriate for me to talk about future pricing decisions in mobile. We’re very pleased with the business, and we’re really pleased to see more customers choosing Telstra. And you would see in the period, actually when you look at postpaid, prepaid and our wholesale business, we’ve added more than 340,000 services in the period. And I think it really reflects years of investment in making sure we have a leading mobile network. Whether it’s rolling out 5G, now at almost 87% population coverage. Whether it be the transition away from 3G onto 4G across the country. The investment in resilience, security, we can see that that is absolutely top of mind for customers, and we can see them making the choice to choose Telstra more."




Q9/ David Swan / "I wanted to ask secondly just about the Optus outage, if you’re expecting any more likely regulations as a result of the outage and the sort of fallout from that, or will you be recommending any? And are there any lessons for the sector from that outage?"

A9/ Vicki Brady / "Around the Optus outage. There are obviously a number of reviews running at the moment, and I think that’s incredibly important. Whenever there is an outage of that magnitude, it is so important that we all lean in and understand the lessons out of those. Our approach is, whenever there is an outage around the world, a significant outage impacting another operator, we always work very closely to understand with our vendors and with those companies what’s happened, and take any of those lessons into what we can do differently."

"And so our focus at the moment is absolutely being involved in those reviews, where required. And I think the thing that’s most important for us is really that those key lessons are taken and we can all adopt those into our various strategies and networks."





Q10/ Stuart Condie / "Given your comments on the number of users attracted from Optus as a result of the outage and the resultant share gain that you’ve presumably enjoyed, can you just give us your thoughts on the outlook for revenue from handsets and other hardware? Particularly given that there are tax cuts and possibly lower interest rates in the offing."

A10/ Vicki Brady / "If you look at our first half year results you’ll see when you look across postpaid, prepaid, and our wholesale mobile business, we’ve added a little over 340,000 customers in the half. Now, what I would call out is we’re seeing population growth in the country and I think that’s been a significant driver of the growth in customers in the half."

"In terms of the Optus outage, as I spoke to earlier this morning, it is difficult to estimate the impact of that. But our best estimate was that that was in the low tens of thousands of services that we were likely to acquire, have acquired in the half. So really I think that growth that you’re seeing in services and in customers choosing Telstra, that is driven – population growth is playing a part, and I think what’s top of mind for customers, is just how important it is to be connected. And so that reliability, resilience is top of mind, and we’ve invested over a lot of years to make sure we have the leading mobile network in the country, including with our 5G rollout where we’re now at around 87% population coverage."

"On the handset front, what we actually saw in the half was we actually saw a decline in handset revenue. And that was really driven by less volume, although the handsets we did sell were of a higher retail value. So we’re certainly seeing that premium end of the market, high-end handsets, people gravitating there."

"Look, our main focus obviously having a mobile phone is incredibly important to enjoy our service, so we give customers the option, they can buy outright from us, they can buy and pay for their device over 24 or 36 months with us. Customers also look to source their devices from other players in the market, like JB Hi-Fi or directly from someone like Apple."

"We’re really pleased overall with the performance of the mobile business. And I think it really reflects customers seeing the benefit of what we’re doing in terms of our investment in network technology and into the service we provide through our contact centres onshore, and the ownership of our retail stores."

"On tax cuts and possibly lower interest rates in the offing, those things will obviously come into play in the macro environment. And it’s certainly front of mind for us that customers are feeling cost of living pressures. And I think we’ve probably seen a little bit of that in
terms of mobile handset sales. But overall we know just how important it is for our customers to be connected."

"I think the macro environment, undoubtedly an improvement in that, and an improvement in confidence, I would expect over time. Yes, people will hold off upgrading their mobile phone, I think, when they’re in an environment where they’re under pressure on cost of living. And no doubt, are more willing to consider that when things ease a little bit."





Q11/ Joseph Lam / "About direct-to-handset satellites. There was a mention of a deal with Lynk Global. Can you provide some more information around what that deal consists of, and when customers will be able to utilise those services? And also whether satellite connectivity keeps people connected during a natural disaster or some sort of outage?"

A11/ Vicki Brady / " Direct-to-handset satellite technology: Obviously there’s a lot of innovation happening in the LEO (Low Earth Orbit) satellite environment at the moment, and it’s exciting to see. So, we’re working with a range of satellite providers. In fact, we’ve got a deal with OneWeb, where we recently did our first call over a remote mobile site that’s using OneWeb LEO satellite backhaul to the site."

"We did recently sign a deal with Lynk Global, and that’s really about being able to experiment and test with them direct-to-handset satellite technology. Because we believe, for our customers, what’s happening in that space is important, and the ability to further expand our mobile coverage as this technology matures, we see as an area we should be in, we should be at the forefront of with partners bringing those options and choices."

"The timelines on those things, it’s fair to say the technology is still evolving. And so there’s no definitive timelines yet, but I think incredibly important we’re in that space, we’re working with OneWeb, we’re working with Starlink when it comes to our broadband services, and we’ve got an Enterprise product in market, we expect to have in March a world first with Starlink with broadband and voice service to our consumer customers."

"And then yes, we’ve signed the deal with Lynk Global to be able to experiment and make sure we’re at the forefront with them of looking at direct-to-handset technologies via satellite."




Q12/ Joseph Lam / "On international roaming and population growth and growth in services. Would Telstra look to ink more deals with international providers to increase international roaming? There were some comments there about international roaming being the norm, and that growth there."

A12/ Vicki Brady / "We did see an increase in international roaming in the half, and look, we would say international roaming from our point of view has probably come back to normal levels now, post-COVID. And so that increase is that starting to normalise post a period of us obviously not being able to travel through the COVID period. We have extensive deals in place with other operators around the world to enable our customers to be able to roam internationally. And I think we’re in a good place on that and offering a good range of options for our customers as they travel globally."

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SNOOPY

[Snoopy]

The above is a very long post that covered a lot of ground. But what does it mean for mobile growth going forwards from here? Many of the questions centered around competitor Optus's September 2022 security breach (part of HY2023 for Telstra), more details of which are referenced here.

https://www.sharetrader.co.nz/showth...=1#post1003520

At the time of the Optus hack, this seemed to kick start a somewhat moribund TLS share price at around $3.80 to rise to $4.30 or so by May 2023. In fairness probably a large part of that rise was also in anticipation of an analyst proposed sell down of InfraCo, which did not happen. But with the TLS share price closing at $3.45 on Friday 24/05/2024, well below what it was before the Optus hack and the speculation of the InfraCo sell down started, it is clear that any favourable glow on Telstra from Optus's misfortune has well and truly faded.

Yet in terms of revenue received, the uptrend for mobile is intact into FY2024. Although we should note that the four year full year annual revenue growth trend from EOFY2019 to EOFY2023 was:

$10,084m(1+g)^4 = $10,258m => g=0.43% per year

That growth figure looks across the Covid-19 low dip, although it doesn't consider the rise in EBITDA margin from 34% to 44.9% across five reporting periods. Using EBITDA as a measure for a technology company which requires ongoing spend to upgrade to new generation mobile technology while the older generation technology takes a significant depreciation hit? Perhaps EBIT margin would be a better figure to use in this instance?

Telstra's CEO Vicki Brady is cautious in her outlook from here, noting that the roaming revenue recovery from Covid travel restrictions has been achieved. But such a 'market marking event', while it worked in Telstra's favour with the Optus hack, could go the other way next time - they are generally cyclical. I also thought it noteworthy that customer churn of around 11.5% (around 1% per month) is considered 'Business As Usual', unavoidable and part of the normal ebb and flow of the mobile market.

One thing I had not appreciated before is that as mobile phone operating system generational changes advance, it becomes cheaper for the network operator to run. I am not sure if that means 'absolutely cheaper in dollar terms' or 'cheaper for the same amount of data on the network'. I suspect the latter.

"So 5G on its own just as a business case, I know everyone looks to where are the revenue streams that are going to come on top of 5G. But actually the case for 5G was fundamentally about how do we actually serve the demand on our network in the most cost-effective way."

This statement was the most important thing I learned from the presentation. I was fretting about what applications were suddenly going to require this big spend infrastructure 5G roll out to operate. Instead it seems that Telstra is not concerned about this. Whatever - the coming application(s), demand for data is exploding. So it really is a case of 'build the 5G roll out and they will come'. Admittedly that is a dodgy strategy on which to run a business, in my opinion. But with data demand expanding so fast everywhere, at 30% per year in total, it seems to be a strategy that is working, as mobile network operators move through their ever higher traffic able generations of mobile phone networks.

The reminder that mobile contract growth was linked very much to the number of immigrants arriving was timely (the Australian population growth has been 1% per year for each of the last four years to 2024 c.f. New Zealand which has been growing at 0.8% for the last two years) . But most customers just see the benefits of faster speeds, and lower latency. Whether such changes are 'badged' as 5G or not is of little relevance to them. I also found it heartening (Answer A7) that the largest EBITDA growth was in the flagship offering 'postpaid service revenue growth'. This is surely the DNA Telstra at its heart is ideally all about: Supplying a core service that is reliable, resistant to hacking, and having real Aussies on the ground in the help centres to assist when things 'do go wrong'. .

Yet will Telstra's mobile division continue to provide the revenue and profit growth we have seen for the last three years in the next year or two? My reading of the comments as an investor is that it would be foolish to plan on that.

SNOOPY

[Snoopy]

The following questions are relating to financial targets as discussed at the HYR2024 analyst briefing

-----------------------------------

Q1/ Eric Choi / "It does matter, I guess, for EPS and DPS coverage. Since you’ve stuck with your T25 targets of mid-single digit Underlying EBITDA growth and high teens EPS, I think you’re still mathematically suggesting an $8.5 billion EBITDA (EBITDA for FY2023 was $7.862b) , and maybe an 18.5 to 19 cents EPS at the bottom end? Michael, if you could confirm that, that would be fantastic."

A1a/ Vicki Brady (CEO) / "We’ve got our T25 ambitions out there, which you referred to. And we remain confident in achieving those growth rates on Underlying EBITDA, and Underlying Earnings Per Share."

A1b / "Eric, we’re committed to those mid-single digit EBITDA and high teens EPS growth outcomes, and we think they’re ambitious growth objectives. And we’re absolutely committed to those into FY25."





Q2/ Entcho Raykovski / "The market has dividends per share growing to 19 cents per share in FY25. I know you’re not going to give us guidance, but can you comment on what needs to go right for you to be able to deliver that number, given you’re now at the bottom half of the prior EBITDA guidance for 2024? Is it mainly mobile growth that’s the key driver or is it other factors?"

A2/ Vicki Brady/ "What needs to go right in terms of driving that growth in dividend per share? Obviously it is continuing to execute well across the key parts of our business, with a real focus now on making sure we’ve also got our Enterprise business set up for success (Snoopy note: Enterprise delivers services to governments and large enterprise and business customers. It includes DAC, Data & Comnnectivity and NAS, Network Applications and Services). As we talked about, some structural change going on in Enterprise that we’ve seen for a little while now in DAC and calling. And we’ve got a cyclical effect at the moment in NAS. And so making sure we’ve absolutely got that business performing well is also important as we look. And really as management our focus is on driving underlying earnings growth, because we know ultimately that’s the thing that’s going to count to get the outcomes for our shareholders."




Q3/ Darren Leung / "On DAC (Data and Connectivity). I recalled the last result we were talking about pricing, practically pricing customers lower to defend market share. Can you remind me how progressed we are on that, please, just in the context of the ARPU (Average Revenue Per User) that’s stayed pretty resilient?"

A3/ Michael Ackland/ "On DAC we have seen that ARPU compression and revenue compression continue to slow. So we declined 16% in FY23. Revenue decline for the first half was around 10%. We’re doing a good job at retaining our fibre SIOs (Services in Operation) and we’re seeing growth in nbn EE (Enterprise Ethernet, nbn's flagship fibre access product) as well, which is helpful. We would expect by the end of FY25 to have migrated the vast majority of our DAC customers onto in market plans. So we’re well through it. We expect to see that rate of decline continue to reduce as we go through FY24 and FY25."




Q4/ Lucy Huang / "I just noticed with InfraCo margins a slight dip in this half. But just wondering what further efficiencies can drive in InfraCo Fixed in the near term?"

A4/ Brendon Riley (CEO Telstra InfraCo) "We’ve got an awful lot on the go in relation to the operating efficiency side of things. Firstly, in terms of really most of the work we do in the asset life cycle and maintenance space. We’ve got a major tender underway, out to market to that to go and have a look at what we can do to drive further efficiencies there. We stood up a network operations centre and that helps us better coordinate not only across all of our assets, but activity with Telstra and other customers. That’s a really, really important driver of operating efficiency just in terms of scheduling work and maintenance activities."

"We’ve introduced a lot more automation, particularly into the facilities. As Michael has indicated, a lot is happening on energy. So lighting, HVAC and battery replacement programs, which drive energy efficiencies. We’ve got our copper recovery program underway where we extracted over 9,000 tons in the first half. And we’ve got our asset divestment program underway, and we’ve probably got more happening in the second half there. And obviously that not only drives one-off material gains in terms of EBITDA proceeds, but it also helps a lot with operating efficiency. We just have a lot less sites that we need to look after. So there’s an awful lot happening in that space and that’ll continue to be a major priority for me and the team."





Q5/ Kane Hannan/ "The free cashflow guidance. You pulled down EBITDA a little bit at the midpoint, but no changes to free cashflow. Is
there some positive offsets coming through we should be thinking about?"

A5/ Vicki Brady / " As is often the case our free cashflow can be a little bit second half-weighted, and obviously in free cashflow versus Underlying EBITDA there’s more timing and things going on in there. So yes, no change in free cashflow guidance. We remain confident in that guidance. So no change there despite tightening the Underlying EBITDA guidance range."




Q6/ Kane Hannan/ "Gain on InfraCo Fixed. I think you were calling that improved growth in the second half back at the Investor Day, but the nbn revenue growth is going to slow. So is this all the efficiency that you were just talking to, Brendon, or is it asset sales and some of the lumpiness there really what’s driving that improved second half?"

A6/ Brendon Riley / "The second half, definitely a stronger half from an asset sale perspective. Copper recovery also, we’re expecting another good half there. We’re seeing definitely a pickup in some of our commercial works projects and some new orders coming through from satellite providers. And the last would be dark fibre. So dark fibre tends to be a lot of smaller sales until we get the intercity fibre project up and going, but very, very happy with how they are ticking over. So all of those things added together puts us on track to have a good second half."




Q7/ Kane Hannan / "The 'other earnings'. It was a big drag this half despite that one-off gain coming through. So if you just help us understand how we think about that going forward. Is that corporate re-segmentation going to continue to impact that line for the rest of the year and beyond, or is it all one-off noise coming through?"

A7a/ Vicki Brady / "There is a bunch of stuff as you call out in the Other category. There’s always plusses and minuses in there.
Things like revaluing employee entitlements with bond rate moving and various other things."

A7b/ Michael Ackland / "Think Vicki probably covered it on the Other earnings, some corporate restructuring and things. There was also some movements on the valuation of our employee liabilities with bond rate movements just late in the half, and the gain on the towers. So I don’t think there’s anything particularly unusual in there, but I’d probably just leave it at that."





Q8/ Brain Han / "In the cashflow, the 'other' line in the cashflow, Michael, can you talk a little about the decline from [$]189 [million] to [$]61 [million] in the half, and whether you’re expecting any asset sales in the second half to boost that line.

A8/ Michael Ackland / "You will note in the 'other' on free cashflow, the PCP was [$]189 [million], and in this period it was $61 million, which is a big change. That was largely due to some term deposit payments and financing payments that occurred in the prior period. So, we’re still comfortable with our second half outlook and reaffirming guidance on free cashflow. "




Q9/ Joseph Lam / "About earnings per share. So, earnings per share was 8.4 cents but the dividend was 9 cents per share. How are you paying for that, and is this a trend we can expect to continue? "

A9/ Vicki Brady / "Yes, our earnings per share was at 8.4 cents and as you call out, we paid a dividend of – we will pay a dividend at 9 cents per share. The important thing is, as the Board made its decision on the 9 cent dividend, we have a very strong balance sheet, we have strong free cashflow able to support that dividend. And under our capital management framework, we have a policy that is to maximise our fully franked dividend and seek to grow it over time. And so, really those factors come into account and the strength of the balance sheet and free cashflow puts us in a position to be able to support that 9 cent interim dividend to our shareholder."


-------------------------


SNOOPY

[Snoopy]

Once again I have historically adjusted out dividend payments to remove 'special dividends' that were funded by one off nbn (National Broadband Network) compensation payments. These were made to Telstra for handing over their existing largely copper network to nbn, a process that is now largely complete. It was important to remove these special dividends from this forecasting tool, because they are entirely historical, and do not reflect future dividend potential from Telstra.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax - which Telstra does). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our Australian dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate, which I have used for grossing up dividends, is 30%.

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2019	7.5c + 5.0c	10.71c + 7.14c	7.14c
FY2020	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2021	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2022	5.0c + 6.0c	7.14c + 8.57c	15.71c
FY2023	7.5c + 8.5c	10.71c + 12.14c	22.85c
FY2024	8.5c + ?c	12.14c + ?c	12.14c
Total			86.4c

Now we have to select a representative capitalisation rate. For Spark (the nearest NZ equivalent company both are incumbant operators that have had their former fixed line monopoly networks de-merged), I have decided a rate of 6.5% is appropriate. But Australian interest rates have traditionally been a little lower than ours. One way to pick an acceptable equity return rate is to look at the market trading interest rate of any listed company bonds and pick something a bit higher, to account for 'equity risk'

Telstra have the following company bonds listed on the ASX market:
TL1HAA €500m 1.00% Notes maturing 23 April 2030;
TL1HZ: €600m 1.375% Notes maturing 26 March 2029; and
TL1HY: €750m 1.125% Notes maturing 14 April 2026.

When I put these tickers into 'Stocknessmonster', I get a complete blank on both the buy and sell side. So there is no indication as to what market rate (which I suspect will be above the coupon rate) these bonds are trading at!

Never Mind. I would judge a 'gross return rate target' of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 86.4/5 = 17.3c

Using an 'interest capitalisation rate of 5.5%', this equates to a Telstra share price of: 17.3 / 0.055 = $3.15. Telstra shares are trading today at price of $3.87. On that basis, Telstra shares are currently significantly over-valued, by about 23%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year. Any overvaluation might be better considered as a 'deserved growth premium'.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

24.28c/ 0.055 = $4.41

I think the market discount to that $4.41 price (a turnaround on the premium the market was offering to my historical yield of 6 months ago) might be a reflection of the cancelled InfraCo sell-down, from which salivating investors were expecting a quick capital injection. But even so, trading at $3.87, I believe there is a modest growth path priced into the Telstra share price. And with the purchase of 'Versant' announced today, a cloud technology NAS (Network Application and Services) business, we have another 'clip on' should add to that 'growth potential'. This latest Versant acquisition builds on previous acquisitions, most recently of Alliance Automation and Aqura Technologies, which are bolstering subsidiary Telstra Purple’s capabilities to support the end-to-end needs of industry covering network, security, cloud, collaboration, mobility, software development and design, data and AI.

In summary, from a yield perspective alone, Telstra is not cheap, but nor is it obviously overvalued. Whether that growth potential is enough to tick the value investor box at $3.87 is a decision that will require some more work.

Once again I have historically adjusted out dividend payments to remove 'special dividends' that were funded by one off nbn (National Broadband Network) compensation payments. These were made to Telstra for handing over their existing largely copper network to nbn, a process that is now largely complete. It was important to remove these special dividends from this forecasting tool, because they are entirely historical, and do not reflect future dividend potential from Telstra.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax - which Telstra does). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our Australian dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate, which I have used for grossing up dividends, is 30%.

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2020	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2021	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2022	5.0c + 6.0c	7.14c + 8.57c	15.71c
FY2023	7.5c + 8.5c	10.71c + 12.14c	22.85c
FY2024	8.5c + 9.0c	12.14c + 12.86c	25.00c
Total			92.12c

Now we have to select a representative capitalisation rate. For Spark (the nearest NZ equivalent company both are incumbant operators that have had their former fixed line monopoly networks de-merged), I have decided a rate of 6.5% is appropriate. But Australian interest rates have traditionally been a little lower than ours. One way to pick an acceptable equity return rate is to look at the market trading interest rate of any listed company bonds and pick something a bit higher, to account for 'equity risk'

Telstra have the following company bonds listed on the ASX market:
TL1HAA €500m 1.00% Notes maturing 23 April 2030;
TL1HZ: €600m 1.375% Notes maturing 26 March 2029; and
TL1HY: €750m 1.125% Notes maturing 14 April 2026.

When I put these tickers into 'Stocknessmonster', I get a complete blank on both the buy and sell side. So there is no indication as to what market rate (which I suspect will be above the coupon rate) these bonds are trading at!

Never Mind. I would judge a 'gross return rate target' of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 92.12/5 = 18.4c

Using an 'interest capitalisation rate of 5.5%', this equates to a Telstra share price of: 18.4 / 0.055 = $3.35. Telstra shares are trading today at price of $3.45. On that basis, Telstra shares are currently slightly over-valued, by about 3%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown over the current year. Any overvaluation might be better considered as a 'deserved growth premium'. And a capitalised value of such a growth program at 3% of the share's capital value is 'not much'.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

25.00c/ 0.055 = $4.55

I think the continued market discount to around that $4.55 price, a target touted as achievable by some market commentators, might be a reflection of:

a/ The cancelled InfraCo sell-down, from which salivating investors were expecting a quick capital injection AND
b/ The recessionary climate in Australia where, just like New Zealand, much of the expected corporate upgrade NAS revenue has been put on the back burner.

One way of looking at it is to say the near term growth premium has been eliminated. The longer term view is that the share price has reverted to a previous medium term yield rate signifying no long term growth. For a company paying out more than 100% of earnings as dividends, this view makes some sense. It is difficult to meaningfully grow if you cannot retain your capital base.

In summary, from a yield perspective alone, Telstra at $3.45 looks priced about right. But as a value investor, I look to buy at a discount to fair value. At this price TLS shares are giving investors their future growth pans 'for free'. IOW the growth premium not built into the share price becomes your dscount. Depending on your judgement on how profit positive those growth plans turn out to be, will determine if TLS today at $3.45 is a good buy or not.

SNOOPY

[Snoopy]

This post is bringing together the results of the four Buffett Tests that I have detailed in posts 16,17,18,28 and 29 on this thread. Telstra:

BT1/ PASSes the significant size and market position test,
BT2/ FAILs the increasing normalised earnings test over five years,
BT3/ FAILs the return on shareholder equity test (never comes close to the required return on equity hurdle of 15%) and
BT4/ PASSes the ability to raise profit margin test.

If Telstra manages to increase their normalised profits for FY2023, then the 'fail ' grade of test BT2 will turn into a pass.

However, I am of the opinion that Telstra is unlikely to ever earn the hurdle return on shareholder equity that Buffett requires in BT3/ (15%). My reasons for this may be found on the TEL vs TLS thread on the NZX forum, but are particularly highlighted in this post.

https://www.sharetrader.co.nz/showth...=1#post1008165

The summary: Telstra has an inherently higher cost asset base, even adjusted for the respective population difference between Telstra in Australia and the equivalent incumbent Spark in New Zealand. (In contrast to Telstra, Spark clears the 15% return on equity criterion that Buffett sets every year for the last five years easily). If Telstra is unlikely to ever fulfill all of the four qualification hurdles to be a Warren Buffett style investment, does that mean Telstra is un-investible? Of course not. It just means we need to look at alternative investment models to justify an investment in Telstra.

A starting point is the 'capitalised dividend valuation model' (link to post 31 below):
https://www.sharetrader.co.nz/showth...=1#post1003252

This is showing a fair value share price of $3.09. This valuation is driven by dividend rates of recent years being lower than dividend rates today. But the capitalised dividend valuation model is also a zero growth valuation technique. If Telstra is genuinely growing their earnings, then a 'capitalised dividend fair value' price will undervalue the company. So does a credible earnings growth plan for Telstra exist? The two most trumpeted potential 'growth candidates' are 'Telstrahealth' and 'Mobile'.

I address the initiative of Telstrahealth (post 40) and conclude that in the medium term, this is likely to continue to be loss making. Nevertheless Telstrahealth may reduce my estimate of its annual loss from an EBITDA of -$193m to zero by 2025. In relation to FY2022 profit, this may increase EBITDA earnings by: $193m/$1,645m= 11.7% over 3 years (or $193m/3= $64m/year).

Inflation adjusting mobile phone price plans, upping prices by 7% - but with half of that increased reflecting higher Telstra costs-, going through, without significant customer churn (post 39) looks do-able. This could increase profits by: 0.5x0.07x $9,470m= $331m per year.

So both of these growth initiatives together might increase FY2024 EBITDA (or in this particular case NPAT, which is much the same thing) by: 0.7x(2x$64m+$331m) / $1,645m = 20% over FY2022 levels. Such a level of profit growth should be directly reflected in share price growth. We can modify our capitalised dividend valuation model price target to reflect that:

$3.09 x 1.2 = $3.71

Yet that price does not reflect the benefits of the Amplitel sell off (a 5% eps lift, see post 45), nor a potential sell off of InfraCo assets (an 11% eps lift, see post 50). Adjusting for those gives a new fair value share price of:

$3.71 x 1.05 x 1.11 = $4.32

As it happens $4.32 is the exact share price that Telstra closed at, as of the close of business on Friday 24th June 2023 last week on the ASX! That I should come up with a market valuation on a share as well and widely researched as Telstra in accordance with 'Mr. Market' is no great surprise. But 'getting the price more or less right' is much less important than understanding the drivers of that price. In this instance it looks like the forecast profitability increases from the company's identified growth engines of Mobile and TelstraHealth are already priced in, as is the beneficial eps effect and consequential debt reduction on the sale of a minority interest in Amplitel and in the near future certain InfaCo assets. Given that there is 'execution risk' associated with all of these potential events, this indicates to me that Telstra is fully priced at $4.32. As a new investor today, I would be looking to get a bit of a share price discount reflecting these 'yet to be baked in 'earnings per share' profit rises, (as reflected in that $4.32 share price). That means looking for an entry price of less than $4. Taking another perspective, should positive announcements drive the Telstra share price 10% higher than my fair value, to say $4.75, that might be a good target price for trimming your holding.

This post is bringing together the results of the four Buffett Tests that I have detailed in posts 61,62,64 and 65 on this thread. Telstra:

BT1/ As Australia's and with the addition of Digicel, the wider Pacific island's largest Telco PASSes the significant size and market position test,
BT2/ With only one year of earnings decline out of five, PASSes the increasing normalised earnings test,
BT3/ FAILs the return on shareholder equity test (never comes close to the required return on equity hurdle of 15%) despite ROE improving every year for four years.
BT4/ PASSes the ability to raise profit margin test, with net profit margin rising for the fourth year in a row - impressive.

As regular readers will know, to apply the Buffett valuation model, all four of these individual Buffett tests must be passed. Three out of four does not cut it. However, I am of the opinion that Telstra is unlikely to ever earn the hurdle return on shareholder equity that Buffett requires of BT3/ (15%). My reasons for this may be found on the TEL vs TLS thread on the NZX forum, but are particularly highlighted in this post.
https://www.sharetrader.co.nz/showth...=1#post1008165

The summary: Telstra has an inherently higher cost asset base, even adjusted for the respective population difference between Telstra in Australia and the equivalent incumbent Spark in New Zealand. (In contrast to Telstra, Spark clears the 15% return on equity criterion that Buffett sets every year for the last five years easily). If Telstra is unlikely to ever fulfill all of the four qualification hurdles to be a Warren Buffett style investment, does that mean Telstra is un-investible? Of course not. It just means we need to look at alternative investment models to justify an investment in Telstra.

A starting point is the 'capitalised dividend valuation model' (link to post 76 below):
https://www.sharetrader.co.nz/showth...=1#post1053897

This is showing a fair value share price of $3.35. This valuation is driven by dividend rates of recent years being lower than dividend rates today. But the capitalised dividend valuation model is also a zero growth valuation technique. If Telstra is genuinely growing their earnings, then a 'capitalised dividend fair value' price will undervalue the company. So does a credible earnings growth plan for Telstra exist? The two most trumpeted potential 'growth candidates' are 'Telstrahealth' and 'Mobile'.

I address the initiative of Telstrahealth (post 68) and conclude that in the medium term, this is likely to continue to be loss making.
From the 21st May 2024 update
"We still remain confident in Telstra Health. We think the set of assets that we have in Telstra Health fit together, and represent a real value proposition to the healthcare sector. Clearly things are uncertain in the healthcare sector at the moment. I don’t think that’s any surprise to anyone, as many of the different healthcare providers and government departments and government healthcare providers come out of COVID and go through that transition. But the need for digital health and connectivity across pharmaceutical scripts, GPs, hospitals, agedcare, disease registries, all of those assets that we’ve got put together, that value proposition remains incredibly strong."

Nevertheless Telstrahealth may reduce my estimate of its annual loss from an EBITDA of -$247m as Telstra approaches their 2025 cost out target. And reducing EBITDA losses has the effect of increasing overall company EBITDA profits in the big picture.

A widely communicated inflation adjustment to mobile phone price plans took place in July 2023, upping prices by 7% - but with half of that increase reflecting higher Telstra costs. With no net customer churn I forecast this could increase profits by: 0.5x0.07x $9,470m= $331m per year or 3.5%. Actual increases in mobile income was 3.8% with EBITDA margin rising from 43.2% to 47.1% over the HY2023 and HY2024 comparative periods. This is encouraging, and gives substance to CEO Vicky Brady's HY2024 proclamations about how pleased Telstra management is with the progression in mobile division earnings.

However the 21st May 2024 market update has indicated the inflation linked aspect of postpaid price increases will not proceed in July 2024:
"Today we announced that we will be updating the customer terms for our postpaid mobile plans to remove the CPI link annual price review. This change simplifies our pricing strategy by bringing the approach to postpaid mobile plans into line with other products. This approach reflects there are a range of factors that go into any pricing decision, and will provide greater flexibility to adjust prices at different times and across different plans based on their value proposition and customer needs."

This suggests to me that any mobile revenue increases for Telstra will likely track population growth in FY2025/FY2026 and mobile revenue growth will be no greater than that. That doesn't mean mobile network profit increases will be limited to that though, as there will be the cost savings from shutting down the 3G network.

I review the prospects of the three growth engines of this company going into FY2025.

1/ The mobile growth engine is possibly stalling.
2/ The cash benefit of the fibre superhighway is only starting to build AND
3/ Massive restructuring at Network Assets and Services is underway.

The prospect of any real growth in FY2025 is not looking great. Any forecast profitability increases from the company's historical growth engines being Mobile and TelstraHealth (being priced for recovery) are likely already priced in.

Given that there is 'execution risk' associated with all of the restructuring events, this indicates to me that Telstra is likely to be accurately priced at $3.45 given the FY2025 outlook. But those that can look through FY2025 can maybe seeing more value.

SNOOPY

[Snoopy]

In the HY2024 CEO address, CEO Vicki Brady said this:

"On digital leadership, we continue to invest in our digital capabilities to help improve customer experience, uplift our productivity, and help industries and businesses to digitise. Our ambition is to become an AI-fuelled organisation, helping us unlock better outcomes for our customers, our people, and our organisation."

"To underpin this, we are simplifying and modernising our tech and data landscape, and building reusable AI products for the whole organisation to accelerate time to value. Within Telstra, we are now using AI to improve half of our key processes, including to automatically detect and resolve fixed services faults, and to solve customer issues faster."

"For example, in the half, we piloted new AI applications, including Ask Telstra, an Open AI-based solution with Microsoft, to help our frontline teams find the information they need for better and more quickly serving our customers. We’re also investing in our people, including through our Data & AI Academy, to upskill them in AI and help them understand how they can use it in their roles."

AI is expected to be one of the drivers of demand for the interstate-capital 'data superhighway' for Telstras customers. Given this what revealing questions on AI were answered at the half year analyst question session?

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Q1/ Jenny Wiggins / "Can you tell me how much money you’re investing in AI?"

A1/ Vicki Brady (CEO) / "AI, it is such a great topic, isn’t it? It sort of seems to be top of the list of things to be talking about at the moment through results season. Look, we are very much focused on AI. Our ambition is to be an AI-fuelled business. So already to date we’ve improved 50% of our key processes across the business using AI, so using it very deeply in our business."

"Everyone wants to talk about generative AI, obviously the latest and greatest, and we’re also rolling that out and using it across our business. A great example of that is helping our frontline teams be able to get answers and serve our customers even better. And we’re seeing that with a couple of things we’re doing, in 'Ask Telstra' for frontline and a one-sentence summary which is delivering some great results for the teams that have piloted that, and then we’re rolling it out further."

"We haven’t put a specific dollar value on the investment. But frankly, AI has been a big component of how we think about our investment in IT and our network. Even for example, how we do our Cleaner Pipes initiative, keeping customers safe from scams. That’s using a whole lot of AI in the background running. But no dollar value on it."




Q2/ Grahame Lynch / "I wanted to ask about AI, and specifically you’ve mentioned your progress in skilling and adopting AI internally. But it strikes me that you’re way ahead of the general economy there. So have you got plans to perhaps productise and monetise some of those internal systems and processes that you’ve developed, into offerings that you could get revenue from by selling them to Enterprise customers, for example?"
"And on that note, well, more generally, where’s the revenue opportunity for Telstra in AI, aside from I’ve just asked in that question? Do you expect there to be a big increase in traffic, for example, that will result in increased revenues in the medium term?"

A2/ Vicki Brady / "AI, I mean, it is such a fast moving and an exciting place. And our approach is that we think every one of our team members needs to have a good understanding of data and AI. So we will have deeply technical teams, that obviously they need those very specific technical skills. But we’re approaching it that every person across our organisation needs to have an understanding and be thinking about how they can leverage it and make their jobs easier, more efficient and more effective in getting outcomes for customers. So, we are rolling out a Data and AI academy which is about really lifting skills and developing skills right across our teams. It is exciting to be in the thick of that. I think our focus on it at the moment is absolutely for our teams."

"Where we are focused, and to your point, where are the revenue opportunities, how can we help our customers unlock further benefits from digitising their businesses, including from AI? We have a number of areas there we’re excited about. So, inside our NAS business, we do have professional services where we do help our customers around digitisation and AI."

"We also entered the joint venture with Quantium, and that’s an exciting joint venture where we’re bringing the power of Telstra and Quantium together, yes, to help us in how we apply AI and data analytics into our business. But importantly, in how we can work with Enterprise customers to unlock those benefits. And the Scam Indicator product that we developed with the Commonwealth Bank is a good example of that, where the Quantium Telstra joint venture was in the thick of that, helping us bring our information and data together, applying AI and putting us into the position to be able to have the Scam Indicator product in market."

"The other point you raise, which is about capacity. At the end of the day, AI, all of these things sitting in the cloud that we want to leverage and get benefits from, they do need to be connected. And we’re seeing obviously an explosion in data centre investment and growth there, they absolutely need to be connected, and our intercity fibre investment is a good example, as we see demand already. And where we’re at as a country in terms of capacity on those big intercity fibre networks that were built more than 25 years ago now, we know that demand is there, and we see that demand just continuing to grow. So data demand at low latency that can really support those sophisticated applications and unlock those benefits from technologies like AI, we definitely see those as structural tailwinds behind various elements of the business."

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SNOOPY

[Snoopy]

From the HY2024 CEO address on 'natural disasters'.:

"Our customers have faced a number of natural disasters over the last few months, including cyclones, storms, floods and fires, and our teams have worked tirelessly to prepare and respond. We mobilised more than 3,000 of our people to respond on the ground across Queensland, Victoria and Western Australia. Currently, we also have teams responding to the impacts of recent severe storms in Victoria."

"As part of our preparation for future disasters, we successfully tested functionality that could underpin a temporary disaster roaming solution, which would allow people to connect to any available network in a disaster zone." (Snoopy pondering: I wonder if this involves Elon Musk's Starlink?)

Q/ David Swan: "I wanted to ask about just the wild Victorian weather we’ve been having – I know you talked about it a little bit, Vicki. But I wanted some more specificity maybe, with some communities still cut off, how long would you expect that’ll be, the sort of delays there, and where are things at currently? "

A/ Vicki Brady: "As you said, I mean, the severe storms in Victoria, some of the images, it’s almost unbelievable, isn’t it? Just to give an update, and this was as of early this morning just pre us starting our session. Just to give you a sense of where we’re at and the impacts we’re seeing. Again, the impacts we’re seeing are linked to power outages. So obviously we’re all very dependent on making sure we’ve got power up and running, and we’re working very closely with emergency services and the power companies in lockstep to obviously get services up as quickly as we can. "

"As of early this morning, we had about 328 network sites that were off the air. In terms of customer impacts, it was around 5,000 fixed line services and around 23,000 Telstra nbn customers. Specifically in those network sites, it was about 97 mobile base stations off the air. So we are working, as we said, very closely with emergency services and with the power companies. We have teams on the ground where it is safe to do so. We are refuelling generators and deploying further generators into the field. We do have batteries at sites, but as you can imagine, batteries run down pretty quickly, and a site like a mobile base station takes an enormous amount of power to run. And so we are working very closely with the authorities and we’re very aware of the impact for our customers when connectivity isn’t working."

"In terms of timelines, at the moment it’s pretty fluid, and so it is difficult to predict at the moment. And we’re, as I said, doing everything we can on the ground where it is safe for our teams to get in, and be able to refuel generators and get sites back up and running. We’re absolutely doing that. But certainly our thoughts are with everyone impacted by the severe storms and the aftermath of that in Victoria at the moment."

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SNOOPY

[Snoopy]

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 $A2.76, which added up to a package top up price of $A5.81 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 $A4.34. 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.

The prospect of any real growth in FY2025 is not looking great. Any forecast profitability increases from the company's historical growth engines being Mobile and TelstraHealth (being priced for recovery) are likely already priced in.

Given that there is 'execution risk' associated with all of the restructuring events, this indicates to me that Telstra is likely to be accurately priced at $3.45 given the FY2025 outlook. But those that can look through FY2025 can maybe seeing more value.

The last twelve months have not been good for my investment in Telstra. Last year when I was commenting on value the Telstra share price was $4.33. The share price closed today at $3.56! Still the positive way of looking at this is to say that the 'growth premium' has reduced, both from the reduction in price and the improved dividend outlook. My 'no growth' valuation of $3.15 based on FY2023 results, increased to $3.35 over FY2024.

The reasons for the share price decline have been well documented in this thread (no quick payout from selling more assets, and a generally flat outlook for FY2024 moving into FY2025 as high interest rates fight inflation). But Telstra dividends have been increased nevertheless, showing the defensive nature of these incumbent telecommunications providers.

The latest rumour doing the rounds is that 'Telstra Health' might be reorganised/sold. If this were done, and disregarding any sales price, what would this do to the profitability of Telstra?

i'/ By my reckoning, 'TelstraHealth' had an EBITDA of -$243m over FY2023 (refer post 68).
ii/ An overall loss means zero tax income paid by this business unit.
iii/ We now must apportion an appropriate interest bill to TelstraHealth. Revenue is below the $500m near term target (we aren't told the exact figure). But with total revenue for Telstra over FY2023 totalling $22.7billion, we are only talking about the revenue of TelstraHealth being ($0.5b/$22.7b=) 2.2%, at most, of total company revenue. The interest bill for the year totalled (refer post 56) $570m. So 2.2% of that is: 0.022 x $570m = $13m in apportioned interest
iv/ Depreciation for the FY2023 year was $2.42billion at Telstra (AR2023 p110). But a software development unit would be relatively light on capital equipment. So I would estimate depreciation and amortization in the TelstraHealth business unit would be half that of the Telstra business as a whole, which is not only capital intensive, but has mobile spectrum costs to amortize. So 0.011 x $2,420m = $27m, - my estimation of depreciation and amortisation at TelstraHealth.

Putting these four factors together, I estimate NPAT at TelstraHealth over FY2023 was: -$243m-$0m-$13m-$27m = -$283m

-$283m spread over the 11,554m shares amounts to a loss of: -$283m/11,554m= -2.4cps

Removing this FY2023 TelstraHealth loss from the Telstra Group overall normalised profit of 18.4cps (refer post 62) would increase eps to: 18.4cps+0.7(2.4cps) = 20.1cps. That is an increase in earnings of 20.1/18.4= 9.2%. This should allow Telstra to increase their dividends by 9.2%. Such a medium term underlying increase raises the capitalised dividend valuation by that amount as well.

The consequence of more money being available to pay dividends, means the capitalised dividend valuation for FY2023 rises to: 1.092 x $3.35 = $3.66. And this price does not include any capital gains booked on selling the TelstraHealth asset! Or for that matter any other assets that may be put 'back on the table'.

For these two reasons, more income and the potential windfall of some asset sales, I have upped my stake in Telstra today, by adding another incremental holding at $3.56. The other factor is the NZ dollar rising which gives me more Aussie dollars for my NZ bucks, making this an opportune time to look offshore. I still don't count Telstra as a screaming buy at $3.56. I don't think it has the same compelling value investment case as Spark In New Zealand right now (I have been buying Spark over recent months as well). But as a way to diversify my income stream, and an alternative window into the telecommunications landscape, I think investing in Telstra today, to a modest degree, makes sense. Particularly so when I start to 'look through' to FY2025.

SNOOPY