THE DISTILLERY: Tickling Telstra

Jotters are split in two on Telstra's results, while one visits the notion that the bear market may be over.

The commentary on Telstra’s latest results can be divided into two groups. The first group looks at the telcos growing and declining businesses and the strategy of company boss David Thodey to ensure the former overpowers the latter. The second group is more preoccupied with the company’s share price – where it’s been and where it’s going.

Let’s start with the first group. The Australian’s John Durie explains the context in which Thodey is pinning his hopes on mobile.

"The big hope for Thodey is the new iPhone launch, tipped for around September, which hopefully will provide a growth spurt. While 88 per cent of new phone purchases are for smartphones, only 50 per cent of mobile handsets in use are smartphones. Last financial year, Telstra customers made 16 per cent fewer local phone calls on fixed lines and they spent 3.4 billion minutes more talking on their mobile phones, bringing the total to 16.9 billion minutes. Increased mobile usage is of course boosting rather than reducing demand for the fibre network. Thodey has two other identifiable growth drivers: cost cutting and the NBN.”

Speaking of which, The Australian Financial Review’s Chanticleer columnist Tony Boyd says it’s becoming increasingly clear that Telstra can dictate to the government just how quickly some of the NBN-deal funds will be received.

"Thanks to the complex contractual arrangements between Telstra and NBN Co, a small uptick in Telstra’s capital expenditure can guarantee that $2 billion in lease payments from NBN Co will flow much faster than originally expected. This phenomenal return on investment was obvious to Telstra chief executive David Thodey and chief financial officer Andy Penn when they sat down to review Telstra’s revenue outlook for fiscal 2013. The NBN revenue generating option was a simple and obvious one to take. It has the advantage of not being reliant on the ability of NBN Co staff to meet milestones and it heads off the potential for difficult negotiations over future payments should there be a change of government. The option involves speeding up the construction of the NBN Co’s core fibre infrastructure, called the transit network. It is a series of transmission rings that provide connections from fibre access nodes to points of interconnection. Telstra is contracted to build this. It has already completed stage one on time. There are three further stages to be built.”

Business Spectator’s Stephen Bartholomeusz reminds readers why it’s crucial that both these moves work for Thodey.

"In recent years the challenge for Telstra, separate to its relationship with governments and now the national broadband network, has been the inexorable decline in its copper core and, more recently, the implosion within its Sensis directories business. That irreversible long-term loss of revenue and earnings from the public switched telephone network continued in 2011-12, with PSTN revenues down 10 per cent, or $600 million, offset slightly by a 2.9 per cent increase in fixed broadband revenues. The traditional Sensis print directories business suffered a 22 per cent fall in revenue but revenues from its nascent digital marketing operations pulled the fall back to 16.1 per cent. When the haemorrhaging of sales from its traditional core businesses is aggregated, Telstra had to find $736 million in sales from somewhere just to stand still. In the end, with total sales up 1.1 per cent, it found slightly more.”

Meanwhile, on the share price front, Fairfax’s Adele Ferguson says Telstra is operating in an environment when investors are overly sensitive.

"Investors are in no mood to tolerate companies that fall short on profit expectations, are perceived to be holding back on dividend payouts or share buy backs, or face uncertainties just over their horizons. Telstra struck a chord with all three concerns today when it released a profit that was gained on last year but fell shy of market expectations. It is a sign of the brutal attitude of investors in a business climate that has been challenging and will continue to be so for the foreseeable future.”

Fairfax’s Elizabeth Knight begins with the obvious that not many analysts have a buy recommendation on Telstra, thanks largely to the fact that the stock has risen strongly to $4. Where to from here?

"Telstra needed to pull a rabbit out of a hat yesterday to justify a ‘buy’ tag. It didn't. It produced earnings that were a bit shy of analysts' expectations given the second half was a bit weaker than the first. The share price dipped 8¢ to $3.89 in response. It's not that Telstra has done anything wrong. It is still performing well, churning out cash, and sucking up handouts from the government to compensate it for the building of NBN infrastructure. But the strong growth in mobiles it has experienced over the past couple of years will start to taper off in 2013. Telstra still expects to increase its subscriber numbers but not at the same rate.”

In a similar fashion to Ferguson, Fairfax’s Malcolm Maiden argues that the reason for Telstra’s share price decline yesterday was risk shy investors departing thanks to Thodey’s $400 million growth splash.

"Telstra's capital expenditure increased by 5.3 per cent to $3.6 million in the year to June, and included $800 million of mobile network spending. The rollout of Telstra's high-speed 4G mobile service was a new ingredient in the mobile budget. Telstra was the first Australian telco to launch 4G in September last year, and already has 40 per cent of Australia's population covered. Earlier this week, Thodey won the board's backing to put his foot on the 4G accelerator and, potentially, on his competitors' necks. The plan he successfully presented to the board calls for Telstra to boost mobile network spending this year by another $400 million to $1.2 billion and to use the funds to ramp up the 4G rollout. Thodey said yesterday that he wanted to maintain Telstra's ‘network advantage’ but that's just a polite description of a much more brutal strategy.”

But, Fairfax’s Lucy Battersby, an excellent telecommunications writer, gives another side to Telstra’s stock drop with an interesting fact about the register.

"Morningstar's head of research, Peter Warnes, said foreign investors probably sold a lot of shares to lock in currency gains, with the Australian dollar trading close to $US1.06. About 30 per cent of Telstra's shares are held by foreign investors. ‘Look at the currency. These guys were probably buying at $3.50, substantially lower than where it is now at a 52-week high of $4.09. That is a 14 per cent gain on the share, and add in the currency - they probably have a 20 to 25 per cent gain,’ he said, adding that overseas investors got no benefit from franking credits. The results also revealed that the number of active telephone lines had dropped below 7 million for the first time, to 6.8 million, and average monthly revenue from each account dropped below $50 for the first time, to $48.88.”

The other big story out of yesterday was of course the jobs numbers. Fairfax’s Tim Colebatch couldn’t resist pointing out that the carbon tax if it did anything, pushed the unemployment rate down. Fairfax’s Jonathan Swan weaves the latest jobs figures into a Tasmania piece questioning the future of its timber industry.

In other economic matters, Fairfax’s Michael Pascoe reports with a kind of qualified enthusiasm the recent proclamation that the Australian bear market is over. Fairfax’s Jessica Irvine makes the case that the Olympic Games, despite its bias towards economically powerful nations, is at times a more fitting example of pure competition than Australian business.

The Australian’s Turi Condon argues that Australian’s housing market is unlikely to experience a US-style collapse. The Australian’s economics correspondent Adam Creighton says it’s a curious union between former Reserve Bank board member Warwick McKibbon and union kingpin Paul Howes on currency intervention.

In company news, The Australian’s Damon Kitney says the attendees of News Corp’s most recent board meeting would have felt a fresh sense of possibility with the company’s flourishing film assets set to be split from its struggling print business.

Fairfax’s Michael West points out how ridiculous it is for Suez Environment, a French water giant, to call its Australian arm a "small proprietary company” when it’s the largest PPP contractor in the country.

Fairfax’s Insider columnist Ian McIlwraith laments the high cost of searching basic corporate information via the Australian Securities and Investments Commission. The Distillery lends a sympathetic ear here: In the age of skinny media budgets, this is a real problem!

And finally, The Australian’s Giles Parkinson reports the little known fact that investment in new plants generating electricity from renewable resources exceeded that invested in fossil fuel plants for the first time last year. It’s a trend that’s expected to continue.


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