Telstra Corporation Limited

New strategy for long term growth: Telstra Corporation Limited’s (ASX: TLS) stock tumbled by 4.8 per cent on June 20, 2018 following the announcement on their recent Telstra strategy. The market seems to be disappointed with the FY19 earnings projection along with uncertainty on dividends in the upcoming year.

The main objective of this strategy is to lead the Australian market by simplifying its operations and product set, improving customer experience and reducing its cost base. Following this, the company has set a target to do the net reduction of employees and contractors by around 8,000 workforces including removing one out of every four executives and middle management roles to flatten the structure. As a result, the company hopes to save $1 Bn and handle the cost of putting resources into future technology.

Besides this, the group is at the cusp of creating a wholly owned standalone infrastructure business unit, called Telstra InfraCo, effective from July 01, 2018. This infra business unit will consist of Telstra’s high quality fixed network infrastructure and involve data centres, non-mobiles related domestic fibre, copper, HFC, international subsea cables, exchanges, poles, ducts, and pipes. Its services will be sold to Telstra, wholesale customers and NBN co. This business will also involve Telstra’s NBN co commercial activities and Telstra Wholesale with a total workforce of approximately 3,000 employees. Telstra estimates this business will have a value of around $11 Bn and revenue and EBITDA of about $5.5 Bn and $3 Bn, respectively. Further, the group plans to reduce the number of consumers and small business plans from 1,800 to 20 with the objective of simplifying its product portfolio. It will also migrate all consumer and small business products and plans and 50 per cent of enterprise customers to completely new technology stacks within three years and enabling it to stop the development of products on legacy systems, and aggressively rationalize old applications and services. Although, the management believes that these structural changes will improve its productivity program by a further $1 Bn to reduce underlying core fixed costs by $2.5 Bn by FY22. The key drivers of the increased productivity targets include simplifying the product set, phasing out legacy products and systems and migrating customers to new products. Other drivers include further digitizing sales and service channels and continuing to improve procurement practices. Henceforth, the group previously forecasted $10.1 Bn of EBITDA for FY18. In FY19, it is now expecting EBITDA in the range of $8.7 Bn to $9.4 Bn, excluding $600 Mn of restructuring costs.

In another release on ASX, the group confirms that there is no change to its capital management framework and expects its Capex to sales ratio in the range of 16-18% in FY19. Over the medium term, Capex to sales ratio is expected to be around 14%. Further, the group re-affirmed that the dividend for FY18 will be 22 cents per share. Telstra’s policy going forward is set out to pay 70% to 90% of underlying earnings and return in order of 75% of net one-off nbn receipts through fully franked special dividends. Meanwhile, the share price has fallen by 20.55 per cent in the past six months as at June 19, 2018 and is trading close to 52-week low level ($ 2.695). Hence, we maintain our “Hold” recommendation on the stock at the current market price of $ 2.770, considering its new strategy to manage its shrinking market share within the competitive market along with decent dividend policy for FY18.

 
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