TLS

[Snoopy]

The last few years have seen Telstra dividends 'beefed up' by federal government payments as Telstra's long standing legacy nationwide network is 'signed over' to new management in the Federal Government controlled 'National Broadband Network'. Management have been quite up front about doing this, even splitting their dividend into 'ordinary' (from normal operations) and 'special' (as a result of nbn payments) parts. However the nbn party for dividend hounds has now come to an end. This is why this dividend analysis has been 'adjusted' to take out the special (nbn funded) components of historical dividend record.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate is 30%.

Year	Dividends as Declared	Gross Dividends	Gross Dividend Total
FY2019	7.5c + 5.0c	10.71c + 7.14c	17.85c
FY2020	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2021	5.0c + 5.0c	7.14c + 7.14c	14.28c
FY2022	5.0c + 6.0c	7.14c + 8.57c	15.71c
FY2023	7.5c + 8.5c	10.71c + 12.14c	22.85c
Total			84.97c

Now we have to select a representative capitalisation rate. For Spark I have decided a rate of 6.5% is appropriate. Telstra is now a very similar company to Spark (both are incumbant operators that have had their former fixed line monopoly networks de-merged). But Australian interest rates have traditionally been a little lower than ours. So I would judge a gross return rate target of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 84.97/5 = 17.0c

Using an interest capitalisation rate of 5.5%, this equates to a Telstra share price of: 17.0 / 0.055 = $3.09. Telstra shares are trading today at price of $4.34. On that basis, Telstra shares are currently significantly over-valued, by about 40%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

22.85/ 0.055 = $4.15

My interpretation of this is that Mr Market is telling us the recently elevated level of dividend is not only sustainable, but might be expected to grow a little. But is that true? Of will earnings 'revert to the mean'? Know the answer to those questions, and you will know if TLS is currently trading at a fair market value, given its business outlook.

SNOOPY

[Snoopy]

Since I have determined that the share price of Telstra today is pricing in growth, where will this growth come from? The best people to answer this are the senior executive team. Here is what they said about the future of Telstra when reporting on the half year. My notes are from the Q&A session after the 'official result presentation'.

https://www.telstra.com.au/aboutus/i...ancial-results

-------------------------

Vicky Brady CEO

Cost Out

$500m more cost out will be taken out by 2025, as part of the T25 'cost out' strategy. This target was set when inflation was 3% (not 7%), but Telstra are determined to maintain their savings goal. The strategy is to get legacy costs out (including the legacy fixed infrastructure - decommissioning is increasingly important across the business), and go for more automation in customer interactions.

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses. Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach. Tens of thousands of customers were affected both ways, but the net result is growth. The 12 month CPI figure to the end of March each year is the basis for price reset consideration. But there are many considerations, and the current cost of living crisis is to the fore. Some customers will move to other brands, some will move to prepaid but it is all within expectations. A one off $42m charge was taken in the half year against migrating customers from a whole range of old products, across to new simplified plans.

Growth at the lower end of expectations

Mobile hardware sales have increased relative to the PCP (+12%), but not at the rate anticipated. Taken over all customers, average renewal time for phones is three years. Meanwhile fixed business across C&SB (Customer and Small Business) and data and connectivity are not at the levels anticipated. These are the two principal reasons Telstra has suggested the FY2023 full year result will be towards the lower end of the guidance range. Hardware sales being lower builds up customer deferred debt.

Optimising nbn connections

Only 10% of Telstra nbn customers are on a 'fibre connect' 100MB plus plan (the fastest nbn option). Telstra is behind the overall market on this. So there is opportunity to upsell to customers the higher speed plans, and so increase margin, even as the nbn cost base increases. The wi-fi guarantee is important on the revenue side. Increased demand is driven by ARPU lift. 'Belong' (Telstra's budget brand) SIO (services in operation) did slow as a result of price increases. A reasonable return goal for nbn margin is 'mid teens' by 2025. Given the pressure on finances, Telstra advocates that in the overall nbn product mix, there should be no further wholesale price increases on the family friendly 50/20 (download speeds of 50MBps, upload speed of 20MB/s) plan.

Future growth horizons

Telstra Heath is destined to be a $500m per year revenue business by 2025. Although the organic business is growing, Telstra is prepared to make acquisitions to get there (e.g. bought on 06/08/2021, for $350m, 'Medical Doctor', a leading general practice clinical and practice managment software company), but Telstra Health are currently still in the investment phase. EBITDA benefits will come in the medium term.

Asset Sales

No decision has been made on the monetization of 'InfraCo Fixed'. Sale of 49% of this could bring in $A7-8 billion.



David Burns (Group executive 'Enterprise')

Business Customers

A key goal is to retain Telstra's DAC (Data and Connectivity) customers. Retention of large business customers on fibre is Telstra Enterprise's number one focus. Some historical Telstra packages in the market are at above market rates. Telstra are pro-actively going out to retain these customers on new deals. Telstra is aligning offerings to certain industries and segments. The goal is to offer unique products to specialist segments.

Connection bundles are being promoted pro-actively to mid size business customers, before the normal three year right of renewal comes up. Three quarters of ARPU (Average Revenue Per User) compression, owing to proactively meeting the market on pricing, are still to be worked through in the NAS (Network Added Service), or 'Telstra Purple' business, (as Telstra brand it to their customers).

Data centres

International data centre player AWS (Amazon Web Services) have announced two of their local data centre zones: Perth and Brisbane with Adelaide likely following on. Telstra partners closely with the two largest players, Microsoft Azure and Amazon AWS, in data centre roll outs. Telstra's 'inter city fibre' startegic investment integrates with AWS and Azure to allow them to utilise their data centre capacity. Integrating with data centres is a key Telstra's strategy, as is partnering towards certain industries (like Mining,/Construction/Energy, a very focussed cross industry cluster for Telstra). Telstra is driving value up the stack through acquisitions in IoT (Aquara) and industrial automation (Alliance Automation) and Epicon (that can bring all the data into decision making processes faster). Hyper-scale data centres built by others are investments Telstra welcomes.



Michael Ackland CFO

Cashflow crunch in HY2023

Working capital has been deployed to increase the stock inside Telstra's now in house owned stores, and as a result. growth in device sales is expected in the second half. Bad debts are not an issue. In fact, the quality of receivables is improving. Corporate reconstruction relief has been applied for in relation to stamp duty. NAS is expected to have a stronger second half as it is seasonally and milestone driven.

$110m increase in fixed cost core due to labour and non-labour inflation flowing through (flow on costs of in sourcing stores and on shoring call centres. Cost out on the rest of the business is on track.

Fixed wireless as a substitute for fibre

Telstra will focus on home wireless fixed when it makes sense for customers.

--------------------

SNOOPY

[Valuegrowth]

https://markets.businessinsider.com/...lectric-2023-5

[Snoopy]

https://markets.businessinsider.com/...lectric-2023-5

Interesting, but I think the referenced article relates to Tesla, not Telstra!

SNOOPY

[Snoopy]

Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach.

Here is some detail about what happened in the Optus security leak

https://www.abc.net.au/news/2022-10-...ting/101486874

Things to look out for....

Phishing scams: e-mails texts or calls that looks like a company you know but isn't. What these messages have in common is that they will ask you to follow a link to fix a problem: Don't! If you are concerned, contact the organization yourself to see if the problem is legitimate.

ID Theft: You may get a call from a bank saying they have missed a payment for a loan you did not know you had. Sign up for credit monitoring or a temporary credit ban.

SIM Porting: This is where a fraudster will take your ID and set up a new account with a new Telco under your name, and move your phone number over to that provider. When they do that they have access to everything you do that requires two factor ID verification. Have a PIN and two factor identification attached to any mobile account.

"Optus has struggled to explain to customers who is affected and how."

"With up to 9.4 million records of Australians' sensitive personal data potentially compromised, services we've taken for granted, such as applying for credit or proving our identity online, might be slowed down or stopped."
"Licensing authorities and the passport office — which had already been facing huge delays — will be jammed with replacement requests."
"The 100-point identification system — the mainstay of applying for anything from a rental to a credit card to a police check — has been undermined."

"Cyber security expert Jeffrey Foster says it is what's been stolen that makes the impact so huge, with scammers potentially not needing anything else from victims to strike."
"It's an extremely low bar, meaning [the hackers] don't even have to tie any additional information to you from previous leaks or go trawling through your social media to find information about you."

"Consumer data advocate Kate Bower from CHOICE says this has created a big problem for banks and financial institutions — in fact, anyone with payment systems."
" "It's going to be a much, much stronger burden on them to be able to identify potential fraud, potential identity theft on their systems," Bower says."

"When you call your bank, the amount of everyday value that it's going to cost that bank is around $40 for every phone call they get," he says."

Now Optus are facing a Slater and Gordon lawsuit.

https://www.abc.net.au/news/2023-04-...aked/102247638

"Law firm Slater and Gordon has lodged the class action in the Federal Court on behalf of more than 100,000 registered participants."

The lawsuit claims Optus breached consumer and telecommunications law and failed in its duty of care to protect users from harm.
" "We have people who work in frontline occupations — police officers — very, very concerned that criminals will find out where they live," the firm's Ben Hardwick said."

"Mr Hardwick said the lawsuit would be seeking a "substantial" compensation sum on behalf of those current and former customers."

"Former customer Kate— who is part of the class action and asked not to be identified — said she had experienced domestic violence in the past."
" "The release of this data has potentially breached the safety of me and my children," she said."
" "I've spent every day basically anxious, just wondering if my details were going to fall into the wrong hands." "

"Optus apologised for the breach and set aside $140 million to help customers renew ID documents and commission an independent report into the breach."

SNOOPY

[Snoopy]

Future growth horizons

Telstra Heath is destined to be a $500m per year revenue business by 2025. Although the organic business is growing, Telstra is prepared to make acquisitions to get there (e.g. bought on 06/08/2021, for $350m, 'MedicalDirector', a leading general practice clinical and practice management software company), but Telstra Health are currently still in the investment phase. EBITDA benefits will come in the medium term.

'Health' has been earmarked as a great 'growth space'. From AR2016 p15: "Since 2013 we have invested more than $235m to acquire, invest or partner with 18 health related companies., including acquiring hospital resource optimisation designer "Health ID" and software product "ComCare" in FY2016, which will transform and improve the efficiency of the healthcare sector."

Telstra Health turned over $243m over FY2022, up 51% after including the 'MedicalDirector' and 'Powerhealth' acquisitions. The ambition is to see turnover hit $500m by 2025 (refer analyst briefing HY2023) . So what is Telstra Health doing in the health space?

Telstra Health

TelstraHealth is overall, billed as a 'software developer', and has 1400 employees across 15 locations.

https://www.telstrahealth.com/

The link above takes us to a range of Telstra Health solutions

Hospitals

a/ 'Kyra' A digital health platform, with many sub-parts: 'Kyra Clinical' for care co-ordination, , 'Kyra Flow' for workforce optimisation and task management, 'Kyra Connect' for e-referrals and secure messaging, 'KyraIQ' for real time analysis and reporting, 'Kyra medications' for inpatient and discharge medications and reconciliation.

b/ 'Clinical Content by Telstra Health' Aggregated clinical content solutions and innovative access and discovery technologies. coupled with data insights designed to enhance decision support at the point of care and enable better health outcomes.

c/ 'AusDI' (Operated by 'MedicalDirector'- see below) Australia’s most holistic and accurate medicines information resource

d/ PowerHealth' (Bought a 70% stake for a $95m in Q1 FY2022) PowerHealth help healthcare organisations deliver the highest quality medical care at the lowest operational costs. PowerHealth specialise in activity-based costing, hospital billing, healthcare budgeting, AR-DRG classification and digital wayfinding solutions. Australian Refined Diagnosis Related Groups (AR-DRGs) is an Australian admitted patient classification system which provides a clinically meaningful way of relating the number and type of patients treated in a hospital (known as hospital case-mix) to the resources required by the hospital.

e/ 'Health Virtual Care' Virtual Health Monitoring is an innovative software solution from Telstra Health that connects clinicians with patients via a mobile device so they can remotely monitor and manage a patient’s illness, recovery, chronic disease and other conditions.

Primary and Community Care

a/ Health Virtual Care (as above)

b/ MedicalDirector (Bought for an EV of $350m in Q1 FY2022) Practice management in one seamless tool, from 'the numbers' to medicines with cyber security.

c/ Communicare Australia's leading fully integrated patient information service, which can provide a 'patient centric view' of a patients journey through the health system.

Aged & Disability Care Providers

Enabling a holistic view of medications, assessments, care plans, admissions and business processes, to ensure compliance, manage funding streams, improve efficiencies, communicate with families, and enhance the overall quality of care for residential aged care providers.

Pharmacy

a/ FredIT Pharmacy Solutions including Fred NXT, Fred Dispense, Fred Mobility, Fred Office, and Fred POS.

b/ eRx Script Exchange Australia’s largest prescription exchange service for GPs, pharmacists, and patients.

c/ MedView is the national cloud based platform that hosts a range of eHealth applications that help Australian healthcare professionals make medication use safer for their patients. MedView is powered by the eRx Script.

Population Health

With the objective of improving lives through connected healthcare, Telstra Health is working with health organisations and funders to integrate clinical information around a patient to support a more patient-focused health system. Clinicians get a more complete view of their patient’s health information, supporting improved quality and safety of care. This includes preventive health, chronic disease management and population health screening programs.

There are more than 16 million patient records worldwide securely managed through TelstraHealth's population health platform. MedicalDirector UK’s innovative Helix VaxApp (a cloud based solution) has on 29th March 2023 received approval from NHS England to be used across the health service’s COVID and flu vaccination programme. Meanwhile in the United States, Telstra's 'Cloudhealth' product helps integrate multiple cloud resources that might be built by the likes of Amazon and Microsoft. As cloud footprints increase, they became more complicated, causing a large organisation to lose visibility on the infrastructure of its cloud stack. 'Cloudhealth's centralised data analytics platform provides analysis, trend reporting and recommendations on the cost, usage and performance of all its cloud services in one place.

SNOOPY

[peat]

Australia’s largest telco unveiled a number of bill increases on Monday

Since I have determined that the share price of Telstra today is pricing in growth, where will this growth come from?

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses.

[Snoopy]

Australia’s largest telco unveiled a number of bill increases on Monday

Thanks for the notification. Here is what is happening to Telstra mobile plans.

Telstra Mobile	Telstra Upfront Mobile Plan Basic	Telstra Upfront Mobile Plan Essential	Telstra Upfront Mobile Plan Premium
Download Speed max	250Mbps	No restriction	No restriction
Australian fixed lines & mobile lines	Unlimited calls & texts	Unlimited calls & texts	Unlimited calls & texts
data cap before 04/07/2023	40GB	180GB	300GB
data cap after 04/07/2023	50GB	180GB	300GB
plan price/month before 04/07/2023	$58	$68	$89
plan price/month after 04/07/2023	$62 (+6.9%)	$72 (+5.9%)	$95 (+6.7%)

The equivalent Optus plan pricing is here. Downloads can be reduced to the quoted speeds at peak hours.:

Optus Mobile	Small Optus Choice Plus Plan	Medium Optus Choice Plus Plan	Large Optus Choice Plus Plan	Extra Large Optus Choice Plus Plan
Download Speed max	1.536Mbps	1.536Mbps	1.536Mbps	1.536Mbps
Australian fixed lines & mobile lines	Unlimited calls & texts	Unlimited calls & texts	Unlimited calls & texts	Unlimited calls & texts
data cap	30GB	100GB	220GB	360GB
plan price/month	$49	$59	$69	$89

Finally here are the monthly Vodafone deals.

Vodafone Mobile	Small SIM Only Plan	Medium SIM Only Plan	Large SIM Only Plan
Download Speed max	Heavy users restricted	Heavy users restricted	Heavy Users Restricted
Australian fixed lines & mobile lines	Unlimited calls & texts	Unlimited calls & texts	Unlimited calls & texts
data cap	40GB	150GB	300GB
plan price/month	$45	$53	$65

It will be interesting to see the monthly customer churn from these new Telstra rates. I guess people affected by the Optus data breach may never go back at any price. It looks like a few dollars will be saved by going with Vodafone though.

SNOOPY

[Snoopy]

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses. Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach. Tens of thousands of customers were affected both ways, but the net result is growth. The 12 month CPI figure to the end of March each year is the basis for price reset consideration. But there are many considerations, and the current cost of living crisis is to the fore. Some customers will move to other brands, some will move to prepaid but it is all within expectations. A one off $42m charge was taken in the half year against migrating customers from a whole range of old products, across to new simplified plans.

The Australian CPI for the twelve months to 31st March was 7.0%. Telstra said all the right things in their half year announcement. But the response in their mobile pricing looks a bit tone deaf. They have pushed their plan pricing 'to the max', and, rounding to the nearest dollar, 'have gone the full inflation adjusted hog'. Despite the fringe growth product streams in other categories, mobile does look like the primary growth driver for Telstra. I am frankly surprised at how generous the terms of all the existing mobile plans are, in terms of data and minutes (post 38). I am obviously completely out of touch with with the data requirements of the user generation driving these plans. Are they plugged into Spotify all day? Are they catching up on the soaps they missed sitting in traffic jams in their cars (yes I realise Australian traffic jams are worse than NZ)?

I do agree that if you are going to chase mobile margin, striking while your largest competitor is weakest is the time to do it. But if there really is a cost of living crisis in Australia, and I don't doubt there is, wouldn't you as a user be tempted to save a few bucks on your monthly phone bill ($17 a month if you went to Vodafone) with no loss of data or minutes by switching? How much 'premium value' exists within the Telstra brand? I guess we Telstra shareholders are about to find out!

SNOOPY

[Snoopy]

'Health' has been earmarked as a great 'growth space'. Telstra Health turned over $243m over FY2022, up 51% after including the 'MedicalDirector' and 'Powerhealth' acquisitions.

Telstra Health

TelstraHealth is overall, billed as a 'software developer', and has 1400 employees across 15 locations.

https://www.telstrahealth.com/

Page 25 in AR2022 gives an 'income' break down of 'Other' of $755m. For income we are not talking about NPAT or even EBITDA, but more generally 'revenue'. Looking at the segmented results table, AR2022 p88, and we can see that this $755m Telstra 'other' revenue contained inter-divisional sales of $291m. Take those out and the sales to external customers were $464m. Using this figure combined with information in post 18 that I compiled on normalised earnings, I think the revenue picture for 'Other' over FY2022 looks like this:

'FY2022 Other Revenue'
Telstra Health	$243m
Bond rate changes effect on employee liabilities	$80m
Cumulative Catch Up Adjustments to Revenue	$47m
Integration costs for 'MedicalDirector' and 'Powerhealth'	($58m)
Net gain in Property Plant & Equipment and intangibles of $158m and Business Unit sales of $7m	$165m
Adjustment Expense	($13m)
equals Total	$464m

The EBITDA contribution margin for the total 'Other' earnings for FY2022 (AR2022 p23) was 6.3%, where the:
"Contribution Margin Percentage = (Total Sales Revenue – Total Variable Costs) / Total Sales Revenue

For all entries in the table except Telstra Health, the net revenue from the sum of these, $221m is the EBITDA contribution. That $221m has a contribution margin percentage of 100%, (because all those figures are net of costs). Weighting this sum against the Revenue from Telstra Health at at unknown contribution margin 'C', the following equation must hold:

C x $243m + 1.0 x $221m = 0.06 x $464m => C = -0.79

This means the TelstraHealth EBITDA loss for the FY2022 year was: -0.79 x $243m = -$193m.

The HY2023 investor update (post 32), tells us that the medium term goal is to get TelstraHealth to $500m in revenue by FY2025. That kind of revenue would likely wipe out any loss and bring TelstraHealth into a positive EBITDA position. To me this looks a few years away. So as promising as this TelstraHealth business unit sounds, the profit growth is not meaningful in light of an overall Telstra business that, over FY2022, had an EBITDA of $7.256billion. Scratch TelstraHealth as a growth engine for now!

SNOOPY