Telstra is finally off the hook

Telstra's first dividend increase in eight years is a sign years of restructuring are now paying off. Once its NBN role is renegotiated, the telco will face the question of acquisitions.

It may not sound like much but the half-cent increase in Telstra’s interim dividend is highly symbolic. It’s an expression of the group’s confidence that after years of restructuring and uncertainty it is now on a more stable and predictable trajectory.

With the sales of its CSL mobiles business in Hong Kong and 70 per cent of Sensis, and the earlier sale of the Telstra Clear business in New Zealand, David Thodey and his chief financial officer Andy Penn are creating a much simpler business but one – for the first time in a long time – with a growth tinge to it.

Telstra’s first dividend increase in eight years came after it posted a 9.7 per cent lift in earnings – or a 19.6 per cent increase if earnings from discontinued operations are excluded.

While the $1.8 billion dividend payout is larger than the $1.7 billion of reported earnings, and appears therefore to be consistent with Telstra’s history of having to borrow to cover its dividends, Thodey said today that the group’s underlying earnings were around $2 billion.

The Telstra board wouldn’t have increased the dividend if it didn’t believe it was sustainable – a clear pointer to the group’s confidence about its outlook.

The result was built on the continuing strength of Telstra’s sector-leading mobiles business, where revenue was up 6.4 per cent and the group’s earnings before interest, tax, depreciation and amortisation margin improved from 38 per cent last year to 39 per cent, on the back of increased average revenues per user.

It helped that Telstra slowed the rate of decline in its fixed-line business, with revenue down only 1.5 per cent as the continuing fall in voice revenue was largely offset by increased data revenues and the burgeoning impact of payments related to the national broadband network. Telstra had $294 million of NBN-related revenue in the half.

Thodey appears confident that Telstra can continue to control that rate of decline in fixed-line revenues which, at about $3.6 billion and with an EBITDA margin of 61 per cent from voice services, remains a core element of the group’s sales and earnings.

Telstra has re-commenced negotiations with NBN Co and the Federal Government as the Abbott Government seeks to change the nature of the NBN from a fibre-to-the-premises network to a multi-technology network.

Thodey made clear that Telstra is prepared to co-operate, provided it can maintain the value of the current deal it has with NBN Co and the government, which has been calculated at $11 billion in net present value terms.

There’s no downside for Telstra – and potentially some upside – in those negotiations, with Thodey saying Telstra would consider any opportunities to play additional roles in the rollout and nominating design and construction as an example of those opportunities.

As the NBN gradually displaces Telstra’s fixed-line network, the group will need to find new areas of earnings and growth. The result indicates Telstra is well on its way to building new revenue streams, with the group placing particular emphasis – and investing heavily – in three relatively new business groupings.

Network applications and services revenues grew 29 per cent to $821 million in the half. Meanwhile, international revenue (albeit boosted by a 27.5 per cent increase in CSL revenues) was up 28.3 per cent and Telstra spent $226 million in the half to add to its growing portfolio of strategic investments.

Telstra’s continuing media businesses – which include its half share of Foxtel – performed solidly rather than spectacularly during the half, with Foxtel’s revenue flat but its EBITDA up 6 per cent as it crystallises the synergies from its merger with Austar.

The telco’s decision to largely exit its exposure to Sensis through its sale to private equity – on terms that could be regarded as very generous – was put into perspective by a 13 per cent decline in Sensis’ revenue, including a 31.7 per cent plunge in print revenue.

Reflecting the accelerating shift in the nature of its business, and a broader drive to improve its productivity, Telstra says it extracted $230 million of productivity benefits in the half year. That drive to lower costs and raise productivity will be a longer-term feature of the group’s performance.

The strengthening of Telstra’s underlying profitability hasn’t changed its guidance for the full year, which is for low single-digit revenue and EBITDA growth plus free cash flows of between $4.6 billion and $5.1 billion.

With Telstra’s balance sheet metrics at the most conservative end of its target ranges for gearing and debt-servicing, and several billions of dollars to flow from its asset sales, the group is moving rapidly towards the point where it will have to consider whether it makes meaningful acquisitions or begins returning capital to shareholders.

That moment probably won’t arrive until after a new agreement has been reached with NBN Co and Telstra has some certainty as to how a restructured deal will impact its future earnings and cash flows. But the fact that it will soon be in a position to have to make that decision – and that modest increase in dividend – underscores how far it has come in the last few years.

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