Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Cost-out remains key for Telstra and shareholders

Glenn Freeman  |  07 Dec 2018Text size  Decrease  Increase  |  
Email to Friend

The roll-out of 5G may well boost Telstra's (ASX: TLS) revenue, but its continuing cost cutting initiatives remain the most important theme for the telco, says Morningstar's Brian Han.

"Closing the gap between narrow-moat-rated Telstra's current stock price and our $4.40 fair value estimate remains successful execution of the $2.5 billion cost-out program, as well as the group-wide simplification, productivity and fight-back plans for customers," he says.

Telstra CEO Andy Penn fronted shareholders at an investor-day in Sydney earlier this week, where he conceded average revenue per user "are on a negative trajectory" for Telstra and its competitors.

"But I believe as 5G rolls out, that will be one of the things that breathes life back into ARPU growth," he said.

Telstra management also took the opportunity to reaffirm its fiscal 2019 earnings guidance – which Morningstar senior equity analyst, Brian Han, welcomes for two reasons.

"It lends credibility to management's claimed solid progress on the transformation projects to-date...[and] provides confidence that Telstra has the capability to execute [and monetise] on the 5G rollout," he said.

Han is confident Telstra will reap greater rewards from 5G than its competitors Optus, Vodafone and TPG.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Telstra mobile

5G rollout is important but closing the $3bn NBN earnings hole still the main game

"It is certainly well-prepared for 5G, given the recent incremental $3 billion investment program – finishing in fiscal 2019 – to digitise Telstra's network infrastructure and put in place a 5G-ready platform," he says.

Telstra management light on details

However, he finds management's assertions of longer-term revenue opportunities "a little fuzzier".

He agrees that certain segments of telco users, including online gamers, are willing to pay more for 5G's superior latency – a lower latency means higher data download speeds and increased responsiveness for graphic-intensive operations.

5G is expected to provide around 10-times the capacity of 4G, at around 1/30th of the latency.

"The argument extends to the automotive, healthcare, mining industries, and even robotics and virtual reality spheres, where millisecond response rate is critical.

"However, management was unable to put in its presentation slides any concrete overseas evidence these customers are willing to pay more per month for these 5G benefits," Han says.

UBS analyst Eric Choi shares this view, noting that while Telstra believes 5G is a "circuit breaker to reverse mobile yield declines, [management] would not comment on potential monetisation models".

Andy Penn emphasised that each new generation of cellular communication standard – 2G, 3G and 4G – has boosted ARPU for Telstra, and he expects a similar uplift from the transition to 5G.

But Morningstar's Han says such increases were temporary only. "Most value in the chain accrued to exploiters of the improved network – think Netflix, Facebook, YouTube and other application or services providers".

"As such, for the investments they are making, investors should hope that telecom network operators such as Telstra do better at monetising the 5G upgrade."


More from Morningstar

• 5 funds providing electric vehicle exposure

• Investing basics: what is the time value of money?

Make better investment decisions with Morningstar Premium | Free 4-week trial

is senior editor for Morningstar Australia

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend