Telstra, Myer, and the Granite City

Back when Andy Penn was Telstra's finance director and the apparent heir to the role of CEO, he was confident that Telstra could become both an income and growth stock. 

Once Penn got to the office, the governance pressures, problems of generating cash to maintain the dividend, and the need for flexibility in growth situations gradually extinguished the fires of growth. 

But the telecommunications business is about to undergo yet another revolution, and in a strange way, if Telstra is good enough, it can be a beneficiary. Most of the big telcos invested in 3G and 4G mobile networks but were disappointed at the rewards they achieved. 

In fact, content provider giants like Facebook and Google were the big beneficiaries of the networks they set up. Telstra was also in the content business, via Foxtel and the AFL, but they just didn’t have the clout. 

And much of Telstra’s recent efforts have been directed towards maintaining fixed line market share with the advent of the NBN. Now 5G is imminent, and most of the big telcos, including Telstra, are just a bit wary about plunging vast sums into this new mobile network in case they once again don’t get the returns they expected. 

5G: Adapt or die

In a business changing as rapidly as telecommunications, you have no choice. You must invest in upgrades. Indeed, the reluctance of some of the telco giants to embrace 5G is prompting electronics companies like Cisco and Ericsson to consider going deeper into the mobile business, and then of course, there is the gorilla – Chinese company Huawei. 

Huawei is already looking at linking with small mobile companies. The Chinese are running into all sorts of security problems in big government contracts and that makes the consumer market more and more appealing for them to harness their substantial production and knowledge capacity.

All this considered, Telstra could consider itself fortunate. It had an enormous investment in the wire network and successfully sold that at an inflated price to the poor old NBN. 

The 5G network will greatly inhibit the growth of landlines like NBN. Penn has stated publicly that he doesn’t think 5G will affect the NBN – but I suspect he was being strategically diplomatic. If he were to actually believe that, then Telstra shareholders should be worried. Of course 5G will affect the NBN.

What we’re seeing is a whole raft of services and equipment coming down the assembly line to take advantage of 5G. That means potential NBN customers are going to be swamped with all sorts of gadgets and software packages that work best on 5G.

The NBN team is still constructing the network. This really needed to be well-developed so that NBN could compete vigorously with 5G.

And, by the way, 5G is good news for all those that sell phones and many other electronic products. Once again, as consumers, we are going to be put under marketing pressure to re-equip ourselves as the day approaches when we can control our appliances and routine shopping through the internet.

Telstra needs to get back some of Penn’s growth mojo. And it should not forget the opportunities in the internet of things.

We can be thankful that it has taken the first step by reducing its dividend which was far too high for a company that needs to invest in its business. 

In the coming year, Telstra shareholders will be able to get a sense of whether Telstra is an aggressive and innovative player in the 5G game from their own experiences with Telstra marketing. Indeed, if you become bombarded by Telstra rivals in 5G and the Australian telco doesn’t respond, then it will be high time to exit your Telstra positions.

Myer and Medibank

As we often discuss, customer experience can be a useful guide to future performance. As I relayed to my regular readers during 2017, I was yarning with a former Myer salesperson who was very experienced at selling goods. She has since retired and last year went back to the store to buy goods and found no one there to accept her money. This was probably the best indicator you could get that Myer was going to face a lot of trouble and, of course, as we now know, that is exactly what happened. I suspect the Myer of present day doesn’t have the management ability to fix its problems.

Solomon Lew of Premier Investments knows the retail game better than anyone at Myer, and joining him on his Myer crusade is former David Jones CEO Mark McInnes. They are a formidable retail team. They correctly warned Myer shareholders last year that Myer management was on the wrong tram. 

In the vein of customer experience, I was in the company of a friend trying to renew their Medibank private health cover recently. There was a problem in the policy, which appeared to have run out, and it was made more complex by the fact my friend wanted to amend their coverage so that it was more useful to them. But they couldn’t do it. My friend had to spend more than 90 minutes on the phone with various operators. She kept getting told a case manager would have to look at her position and wouldn’t get back to her for days, meaning she wouldn’t be covered for that period.

She finally managed to get coverage but the case manager still had to get involved so there would be delays. This was archaic handling of a very simple problem. Top managers need to spend a proportion of their time in the call rooms listening to operators on the phone to customers. Maybe that was a one-off, but Medibank’s inability to locate a case manager to look at the problem and solve it in a few minutes indicates there could be problems. I wouldn’t sell your shares, but I would watch carefully for signs of weakness in the customer base because that will then confirm that my friend’s experience was not a one-off. 

Granite City rejoices

Finally, last week I talked about the possibility of better times in specialised mining in the longer term. Those better times are not playing out in the short-term. However, it is currently a fascinating state of play where the US is raising the idea of linking with allies like Australia to establish core reserves of essential minerals. Rare earths are high on that list, so longer term this is good news for the Australian mining industry – although, of course, the vagrancies of President Trump do need to be overcome.  

In the absolute avalanche of anti-Trump material involving the steel and aluminium tariffs, I did find one item where people were experiencing of great joy.

Let me take you to Granite City, Illinois, once a powerhouse of American manufacturing. Granite City has been decimated by previous American administrations, but now, on news of the 25 per cent steel tariff, US Steel has announced it will reopen one of its massive steel furnaces that was shuttered in the slump. The celebration in Granite City is incredible. In the eyes of its people, they have a President who not only promised he would put a tariff on steel, but is actually going to deliver on that promise.

It doesn’t make the decision right, but Granite City knows from past American presidents that it is rare for politicians to deliver on their promises.