Investors hang up on Telstra
Morris Kaplan
Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.
It should come as no surprise to anyone involved with Telstra that investors remain under-whelmed by the telco’s attempts to resurrect its former value. For sure stock markets are a fickle place but as we used to say in the markets: “they ain’t wrong!”
When ranked alongside significant telecom companies around the globe such as Vodafone, France Telecom, AT&T, Verizon and Telefonica which have shown positive returns for investors, Telstra has tanked. Indeed the performance of Telstra as an investment grade stock has caused some large investors to air their concerns publicly.
Recently, Investors Mutual, a long term institutional shareholder of Telstra called on the telco to exploit growth opportunities in the media and technology space and “re-imagine” itself beyond a company of network engineers.
The idea being that Telstra is well placed to expand into media, into technology because of its high cash flow.
“It needs to have a better marketing strategy and it needs to take itself beyond a company that’s about the network,” said Investor Mutual founder Anton Tagliaferro.
Historically, telcos like Telstra generally have high margins in terms of operating cash flow. But this may change. Poor service, high churn rates and a spike in defections to other telco providers are biting Telstra’s operating margins hard. Broker research gives us a peep into the woes of Telstra and other telcos with legacy infrastructure.
One research report noted that global experience of telecommunications suggest that Telstra will not succeed in slowing the current decline in fixed line usage and therefore fixed line revenue. Indeed the expectation is that it could accelerate.
Where Telstra’s fixed line telephone usage peaked (in terms of fixed lines per 100 people) from around 54 in 2002 and is now heading towards 40, some advanced telecoms countries like Japan and Finland are 35 and 26 respectively, and falling.
Telstra itself has estimated that about 12 per cent of homes are now wireless only and that trend is robust. Fixed line cash flow from voice and internet, historically a high generator of cash flow, is set to decline rapidly over the next few years. While part of the fixed line decline is attributable to greater mobile uptake, the issue for Telstra which derives just under half of its earnings from fixed line, is that the margins are much lower in mobile.
Labour’s NBN aims to strip Telstra of its fixed line monopoly, making the company a pure retailer of telecommunications services. Investors would hope that Telstra’s David Thodey takes heed of Investor Mutual’s ideas and employs are few savvy marketing people.