Stock of the Day - TELSTRA (SELL)
Today we bring our attention to Telstra (TLS) which is facing tough competition from peers and has witnessed a performance in FY14 which is consistent with FY13 if not better.
Key Statistics (Source – Company Reports)
The Company opened a new Discovery store at 400 George St. This store provides interactive device labs where customers can compare handsets by placing them on a digital display to access information including price, camera, battery, speed and reviews. Customers can explore how technology can enhance their day-to-day life. A dedicated space for business customers to learn more about Telstra’s business offerings, either by speaking directly with a business expert, or by exploring an interactive screen in their own time, has also been provided.
Strategy for Asia (Source – Company Reports)
Recently, the Company also launched Telstra Health. Then, annual Australian Digital Summit has also been hosted wherein the real theme was the need to keep on innovating. TLS is emphasizing on innovation in order to deliver product and service differentiation which will drive customer growth. Within the consumer segment, the Company aims to significantly improve its product value proposition through the roll-out of Australia’s largest Wi-Fi network where customers will be able to use their fixed broadband allocation at any of the Company’s hotspots in Australia and at more than 12 million hotspots overseas. TLS will also provide simple and practical self-service tools and productivity solutions such as the Telstra 24/7® App, StayConnected and Telstra Platinum. In Global Enterprise and Services (GES), the Company will focus on delivering personalized, end-to-end industry-specific solutions; and will define new markets for mobile within Connected Tablets and machine-to-machine technology. The recent investment in the new 700MHz spectrum is reported to be critical to maintaining and enhancing TLS’s network advantage and point of differentiation in mobile segment.
Asian Assets and Infrastructure (Source – Company Reports)
The Company believes to grow Network Applications and Services (NAS) top and bottom lines, invest in Asia, build a successful media and IPTV business and use bundles to differentiate fixed broadband offering; and build new growth revenue and profit streams such as software opportunities like Ooyala/Videoplaza and its e-Health business.
Strategy and FY15 Objectives (Source – Company Reports)
We make a note of the fact that market customer growth continues to be moderate in mobile segment. The Company also reported for some de-activations in prepaid subscriber base. The fixed portfolio performance is consistent with last year, with continued growth in fixed data customers and the rate of decline in voice revenue. The Company has lately reaffirmed that there is no change to the FY15 guidance provided at results announcement in August.
In view of the decision by the newly elected Government with regards to the design of the National Broadband Network (NBN) being modified to use a range of technologies, including a copper based Fibre to the Node network and Hybrid Fibre Coaxial (HFC), TLS needed to renegotiate aspects of its NBN agreements to support this multi-technology mix NBN. In December 2014, the Company signed revised definitive agreements with NBN Co and the Commonwealth to enable the roll-out of the multi-technology model NBN. The agreements are subject to a number of conditions precedent, including ACCC acceptance of a varied Migration Plan in a form acceptable to Telstra and NBN Co, and receipt of an acceptable private ruling from the Australian Taxation Office regarding the intended tax treatment of elements of the revised transaction.
Retail Core Growth (Source – Company Reports)
TLS recently announced the acquisition of Pacnet for US$697m with the transaction subject to regulatory and Pacnet financier approvals. The acquisition is expected to be completed by 4Q15. This appears to be an economical deal and the acquisition may help the Company to strengthen its footprint in the Asian region. However, key things to understand revolve around logical reasoning behind the purchase with answers to the extent Pacnet may duplicate TLS’s existing infrastructure capabilities in the region and to identify whether it is good for TLS to rent the infrastructure instead of owning. Further, whether this deal will allow TLS to help rebound Pacnet’s business which is witnessing a revenue decline with operating losses is another point of interest.
Telstra Daily Chart (Source - Thomson Reuters)
Amidst the environment driven by increased competitive risk in mobile segment wherein competition persists in terms of prices and tariff, and there is an anticipated slowdown in the growth of mobile subscriber in FY15 owing to the presence of aggressive price-based competition and better network performance from companies such as Vodafone; presence of players such as iiNet and other smaller ISPs expecting to benefit from the NBN; criticism against TLS’s fixed line proposal to increase charges; news such as fine of about $102,000 levied against the Company for misrepresenting the price of its iPhone 6 plan in a full page advertisement; risk of attrition in Pacnet’s telco customer base and probable dilapidating economics with regards to owning submarine cable assets given the increasing capacity which may lead to lower prices; and a limited effect on TLS’s earnings owing to the NBN roll-out and other regulatory constraints, make us believe that this may not be a good gamble to bank on. Accordingly, we put a SELL recommendation for this stock at the current price of $5.95
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