Compnay Overview - Telstra Corporation Limited (Telstra) is a telecommunications and technology company. Its principal activity is to provide telecommunications and information services for domestic and international customers. The Company operates through four segments. The Telstra Retail segment provides telecommunication products, services and solutions across mobiles, fixed and mobile broadband, telephony and Pay television/Internet Protocol television and digital content. The Global Enterprise and Services segment provides sales and contract management for business and government customers. The Telstra Operations segment offers overall planning, design, engineering and architecture and construction of Telstra networks, technology and information technology solution. The Telstra Wholesale segment provides a range of telecommunication products and services delivered over Telstra networks and associated support systems to other carriers, carriage service providers and Internet service providers.

 

TLS Details
Capital Raising through Debt Issuance Program:Telstra Corporation Ltd (ASX: TLS) had announced for raising 15 billion euros ($A22.30 billion) through a debt issue in Singapore. The group has announced an A$1 billion bond issue under its Debt Issuance Program and this includes three tranches - A$300 million four-year fixed rate notes with a coupon of 2.90 per cent maturing on April 19, 2021, A$150 million four-year floating rate notes with a coupon of three-month BBSW (Bank Bill Swap reference rate) and 0.82 per cent maturing on April 19, 2021, and A$550 million 10-year fixed rate notes with a coupon of 4 per cent maturing on April 19, 2027.The group intends to use these proceeds from the notes for general corporate purposes.
 
Offloading the rest of the stake in Autohome: The group has sold its remaining 6.5 per cent interest in Chinese online business, Autohome to Ping An Insurance Group for US$217 million (A$282 million based on current exchange rates). The sale price of US$29.30 per share is in line with Autohome’s volume weighted average price over the past 60 days, and Autohome is recently trading at its highest levels in the past 12 months. Further as a result of the sale, TLS’ nominee director to the Autohome Board has resigned.
 
Expanded customers base despite reporting weakness in profit in the first half of 2017:In the first half of 2017, the group reported a total income rise of 2.2 per cent to $13.7 billion (on a guidance basis and excluding the impact of regulatory decisions on MTAS and FAD) while EBITDA enhanced 2.4 per cent to $5.4 billion during the period. On the other hand, the reported EBITDA had decreased 1.6 per cent to $5.2 billion, and net profit after tax reduced to $1.8 billion, taking into account the planned restructuring costs. Further, TLS has added 200,000 domestic retail mobile services, 90,000 retail fixed broadband customers, 124,000 bundles, 292,000 nbn connections and 322,000 Telstra TV devices. The underlying core fixed costs got reduced by 2.6 per cent or $92 million. TLS has also completed $1.5 billion share buy-backs in the first half of 2017. Moreover, TLS has continued to add customers across its key products, including mobiles, fixed data and bundles. The decline of fixed voice customer numbers continued at rates lower than most other major global providers. The Mobile revenue impacts were mainly on the back of the regulatory changes to voice and SMS terminating charges, lower hardware sales volumes and a higher mix of ‘bring your own’ plans.
 

1H 17 Financial Performance (Source: Company Reports)
 
Improving retail business: The group delivered a solid Retail fixed bundled growth during the first half of 2017, with 124,000 new bundled customers, leading to a total of 2.8 million customers on a bundled broadband plan. Retail fixed broadband customers enhanced 90,000 while nbn added 292,000 new services, leading to a total market share of 51 per cent and IP MAN services rose 18.9 per cent. The group’s GES business momentum continued to grow especially in cloud while Industry Solutions surged 56.1 per cent, boosted by commercial works for nbn.
 
Capital allocation strategy review: In November 2016, the group had planned to review the capital allocation strategy over a 6 to 12-month period. The company took into accounts nbn payments, balance sheet structure and settings, longer term capex requirements post rollout of the nbn, investment decisions including M&A criteria and returns to shareholders. The company will retain balance sheet settings consistent with an A band credit rating. Additionally, the group has also finished a $1.25 billion off market share buy-back in October 2016, which was heavily oversubscribed, and a $250 million on market share buy-back in December 2016.
 
Strategic Investment:TLS has planned strategic investment of up to $3 billion for the years FY 17-FY 19. The company is investing in the networks for the future of more than $1.5 billion, in digitization of approximately $1 billion and other improvements to customer experience of up to $500 million. Further, TLS will have financial benefits of return on up to $3 billion extra capex with target run-rate benefits >$500 million per annum (2/3 revenue, 1/3 cost) fully realized by FY21. TLS is targeting aggregate returns in excess of FY16 ROIC of approximately 14 per cent, consistent with guidelines for organic investments. Moreover, TLS has in 1H 2017 improved ADSL speeds for more than 500,000 customers in networks for the future segment. In digitization, the company has rolled out the first tranche of Digital capabilities in a new stack retiring 21 applications. TLS has also launched a cross company approach on Agile/DevOps capability, deployed new solutions for agents consolidating nine nbn interfaces into one, to reduce average handling time and improve the first-time resolution.
 
New Technology:TLS has come up with a mobile hotspot device Telstra Nighthawk M1. The group created this product in partnership with Qualcomm, Netgear and Ericsson, and the same is currently the fastest mobile device in the world and is capable of delivering an incredible one gigabit per second download speed. Moreover, TLS has launched Pixel smartphone through an exclusive partnership with Google in Australia. TLS has launched Data Centre Interconnect allowing customers to connect to 30 data centers globally. The acquisitions of Kloud and Readify, have reinforced TLS credentials as a leading provider of enterprise Microsoft products in Australia bringing more than 250 specialist enterprise software developers to Telstra. 

Network 2020 Delivery Roadmap (Source: Company Reports)
 
Outlook for FY 17:TLS has reconfirmed FY17 guidance of mid to high-single digit income growth and low to mid-single digit EBITDA growth. The free cash flow is expected to be in the range of $3.5-4 billion and capital expenditure is expected to be approximately 18 per cent of sales. Additionally, TLS has outlined the plans that would see more than $1 billion of investments directed towards the regional and rural Australia over the next four to five years. 

FY 17 Guidance (Source: Company Reports)
 
Stock Performance: TLS stock has fallen 16.6 per cent in the last three months as on April 28, 2017. The group delivered a weak bottom line while their Net Promoter Score (NPS) was eight points lower than the same period last year impacted by the network disruptions during the first half of 2017. Further, there has been some impact owing to TPG’s entry as a fourth mobile network operator. On the other hand, the group is making efforts to revamp their customers’ confidence. They are aiming to enhance their NPS by three to six points per annum and achieved a better Consumer NPS during the second half of the 2016 against the first half of 2016 and continued to see positive trend even in this fiscal year. The group has been achieving the strong growth in new customers across the portfolio and has made good progress on the productivity program. The company is boosting their capital position and would continue to review the capital allocation strategy. Moreover, the data usage on the group’s network has been improving and accordingly in the 12 months to December 2016, the traffic over the mobile network surged 39 per cent. Traffic on the group’s fixed network, including nbn, enhanced 51 per cent. The traffic on the Telstra Air Network surged tenfold. The stock has an outstanding dividend yield and is trading at a lower level. The group’s efforts to bring next wave of customer experience improvement and development of digitisation capabilities to achieve strategic goals, coupled with emerging business dynamics to manage competitive environment, are showing signs of positive momentum, with impact from headwinds in a way factored in the recent stock price movement. We give a “Buy” recommendation on the stock at the current price of $ 4.25

 
TLS Daily Chart (Source: Thomson Reuters)

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