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TELSTRA (TLS)

By InvestSMART · 26 Oct 2011

By InvestSMART ·
26 Oct 2011

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TELSTRA (TLS)

Shareholders of Telstra have listened to the Independent Expert and enthusiastically voted for the National Broadband Network (NBN) deal that will relieve the company of a declining business.

Subject to the competition regulator also approving the deal, Telstra will progressively be paid the equivalent of $11 billion in today's money to shut down its copper phone network and pass over the customers to the NBN Co. It will also lease all its pipes and ducts to NBN Co so it can replace the copper with fibre-optic cables.

Even though it earns very high profit margins, Telstra's fixed-line network has been in decline for close to a decade.

Naturally, Telstra will spend only what it must to maintain the copper network and will instead redirect capital spending towards the high-growth businesses of mobile, broadband, media and network applications such as cloud computing and high-definition teleconferencing.

The company's new hot-shot manager, Gordon Ballantyne, is charged with the herculean task of improving customer satisfaction. To prove the company really is serious about this, the board has realigned management's bonuses strongly towards retaining customers. From the chief executive down, a significant proportion of their annual bonus is now dependent on keeping customers happy.

This is not a superficial, feel-good exercise either. As any successful service company knows, retaining customers and attracting new ones is central to increasing the financial success of the business. The light seems to have been switched on at Telstra.

With incoming NBN payments, lower capital expenditure and improving core business performance, Telstra's cash-flow situation is improving rapidly. The annual dividend of 28? a share will extend into 2013 and the board can now consider the possibility of returning extra cash to shareholders. The fully franked dividend yield now sits at about 12.5 per cent.

Oddly, the NBN could end up being very beneficial for Telstra, even though it would certainly not have chosen this path for itself. The world of telecommunications is becoming increasingly mobile, as smartphones and tablets pervade our daily lives.

PRICE

Telstra can cement its position as the premier telecommunications service provider. It will eventually no longer have the baggage of providing the basic

fixed-line infrastructure. At $3.15 a share, Telstra is still looking cheap.

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Frequently Asked Questions about this Article…

What is the Telstra–NBN deal and how will it affect Telstra's business?

The article says Telstra shareholders have voted for the NBN deal (subject to competition regulator approval). Under the agreement Telstra will be progressively paid the equivalent of about $11 billion (in today’s money) to shut down its copper phone network, transfer customers to NBN Co and lease its pipes and ducts so NBN Co can replace copper with fibre. That will relieve Telstra of its declining fixed‑line business and change its capital and operational focus.

Does Telstra stop providing the fixed‑line (copper) network after the NBN deal?

Yes — the deal involves Telstra shutting down its copper network and passing customers to NBN Co, while leasing its pipes and ducts so NBN Co can replace the copper with fibre. The article says Telstra will eventually no longer carry the burden of providing basic fixed‑line infrastructure.

Will the Telstra–NBN payments and lower capex improve Telstra's cash flow and dividends?

According to the article, incoming NBN payments together with lower capital expenditure and improving core performance are rapidly improving Telstra’s cash flow. The article notes the company’s annual dividend will extend into 2013 and that the fully franked dividend yield is about 12.5%, which gives the board scope to consider returning extra cash to shareholders.

Is the NBN deal final, or does it need regulatory approval?

The article makes clear the shareholder vote was enthusiastic but the deal remains subject to approval by the competition regulator before it can be fully implemented.

How will Telstra change its capital spending (capex) strategy after the NBN deal?

Telstra plans to spend only what’s required to maintain the copper network until handover and redirect capital spending toward higher‑growth areas: mobile, broadband, media and network applications such as cloud computing and high‑definition teleconferencing.

What is Telstra doing to improve customer satisfaction and retention?

The company has appointed Gordon Ballantyne to improve customer satisfaction. The board has realigned management bonuses so a significant proportion of annual pay — from the CEO down — depends on retaining customers, signalling a serious focus on customer experience as a driver of financial performance.

Could the NBN actually benefit Telstra even though it hands over copper infrastructure?

Yes. The article argues the NBN could be beneficial: by shedding the declining fixed‑line business Telstra can cement its position as a premier telecom provider and concentrate on growing mobile and network services in an increasingly mobile world dominated by smartphones and tablets.

Is Telstra's share price attractive right now according to the article?

The article states Telstra was trading at $3.15 a share and describes the stock as 'still looking cheap,' citing improving cash flow, potential extra cash returns to shareholders and a roughly 12.5% fully franked dividend yield as supporting factors.