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Is Telstra Corporation Ltd worth a Buy?

October 26, 2015 | Team Kalkine
Is Telstra Corporation Ltd worth a Buy?

Solid Market Penetration



Telstra Corporation Ltd (ASX: TLS) built a strong mobile network in Australia, covering around 2.4 million square kilometers of the Australian land and reached over 99.3% of the Australian population. The group witnessed a solid revenue growth in three years across its mobile division, with a rise of 10.2% year on year (yoy) to $10.65 billion in fiscal year of 2015. Retail customer services improved by 664,000, leading to a total of 16.7 million. Telstra’s 4G network penetrated to over 7.7 million 4G devices, while its 4G services reaches to over 94% of the Australian population.


Telstra’s network presence (Source: Company Reports)
 

Building Mobile Services

Despite fixed voice pressure, the group improved its fixed data revenue by 7.3% yoy during the period driven by the better subscriber growth as well as higher average revenue per user. The firm also improved its NBN connections by 126,000 to 211,000 during the period as well as added 280,000 retail bundles boosted by Entertainer bundles and robust offers in market. Over 71% of the retail fixed data customers are under the bundled plan. Telstra intends to develop over 429 new 3G/4G towers in the coming three years and build a further 250 4G data only small cells, which would require an investment of >$340 million in regional and remote Australia. Telstra would be enhancing its capex to 15 per cent of sales in the coming next two years, while Telstra intends to further invest >$5 billion on its mobile services and network in the next three years to June 2017. The group’s postpaid handheld and prepaid handheld revenue (under the mobile segment) improved by 7.7% and 13.1%, respectively, during FY15. M2M segment delivered solid growth with revenues raising by 11.9% yoy, driven by expansion in transport as well as banking sectors. The group entered into several deals with government to get Telstra Air to civic spaces, which would roll out in several public hotspots during the first half of fiscal year of 2016. Telstra Air has 4,000 Wi-Fi hotspots in >250 towns and cities while >50,000 Telstra Air members have joined the network. The group also joined Fon, a leading Wi-Fi provider to improve the accessibility of home broadband for Telstra Air members at greater than 16 million Fon hotspots.


Segment performance (Source: Company Reports)

Investing on Growth Business

Telstra is investing on growth areas and accordingly focusing on Network Applications and Services (NAS) portfolio. Examples of the growth areas include Telstra Health, Telstra Media, the Telstra Software Group (TSG) and Telstra Ventures. The group is also focusing on Asia region for long term. Subsequently, Telstra is witnessing ongoing NAS growth boosted by present as well as new acquisitions and the segment reported an outstanding revenue increase of 23.2% yoy to $2.42 billion during the fiscal year of 2015. Among the NAS segment, Managed network services improved 21.8% yoy boosted by better professional service and security activity, including O2 and BridgePoint. Industry solutions revenues improved by 41.6% yoy driven by commercial works for NBN and Telstra SNP Monitoring. Telstra’s Media segment delivered a revenue rise by 4.2% on a yoy basis in FY15, driven by 18.4% increase in Foxtel from Telstra subscribers boosted by enhanced Telstra bundles and better prices. Meanwhile, Telstra finished the acquisition of Pacnet in April 2015 to expand its network and services in Asia. The group’s international segment revenue excluding CSL surged 29.9% yoy during FY15, mainly driven by China digital media segment growth by 61.1%. China digital media segment also includes Autohome, which rose by 98% yoy driven by better advertising services and dealer subscriber growth.


Strategic investments and acquisitions (Source: Company Reports)
 

Stock Performance

The shares of Telstra shares fell over 12.13% (as of October 26, 2015) in the last three months partly impacted by the Australian Competition and Consumer Commission’s final decision to Telstra for decreasing the access prices by 9.4%, which the group charges other operators who use the group’s network. This decision might add further pressure to the group’s earnings in the coming periods, which is struggling to deliver a single digit top line growth. Telstra’s core fixed segment would continue to be under pressure. The group reported a slight total income increase of 1.2% yoy to $26.6 billion in FY15, but the group’s reported net profit after tax (from continuing operations) fell by 5.8% yoy to $4.3 billion during the period. Moreover, the group did not recently announce any buyback plans which might further hurt the investor’s sentiment. Despite the recent correction, we believe that Telstra stock would continue to be under pressure in the coming months given the recent increase in the competitor footprint, and accordingly give an “Expensive” recommendation to the stock at the current price of $5.51.


TLS Daily Chart (Source: Thomson Reuters)
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