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
About

News

Why Telstra holds strong investor appeal

Glenn Freeman  |  10 May 2018Text size  Decrease  Increase  |  
Email to Friend

This major telecommunications company, a favourite of Australian investors large and small, is trading at a 30 per cent discount to Morningstar's fair value estimate.

Heading up Australia's representation in a sector we rank among the most undervalued Telstra is part of a global communications landscape that is around 14 per cent undervalued, according to a recent Morningstar report.

The roll-out of the National Broadband Network (NBN) has posed a considerable threat to all Australian telco businesses. Further weakening already slim margins on retail broadband providers, it also bolsters existing and new competitors, a huge problem for incumbent leader Telstra.

Telstra chief executive Andy Penn at the end of 2017 flagged increased competition in the mobile market, with TPG Telecom (ASX: TPM) the fourth major operator. "One of our critical objectives is to achieve growth in mobile services revenue which has been under pressure from these competitive dynamics over the last two years," Mr Penn told AAP in November.

"We did see some modest signs of growth in the second half of [2016], however we have yet to see this translate into further momentum."

Morningstar contributor Nicki Bourlioufas last month noted the telco had "plummeted to their lowest level since November 2011, and many investors are now facing a considerable loss on their shares".

While shares have recovered slightly since that $3.10 nadir, they are still only trading at $3.24 as of publication date.

With the well-documented "earnings hole" from NBN, the pressure is on Australian companies in the space to increase productivity. Morningstar equity analyst, Brian Han, notes the need for cost-outs is a global theme, with increasing 4G penetration and a looming jump to 5G and the convergence trend of operators packaging mobile, broadband and pay tv.

"We concede that all telecom operators globally are preaching the need to cut costs. However, Telstra is one of the most leveraged on the upside due to significant inefficiencies buried within its Byzantine mess of legacy systems and processes," Han writes in a report released this week.

However, he is unwavering in his belief that Telstra's narrow economic moat remains intact, "sourced primarily from the cost advantages the group enjoys from its dominant scale and market shares".

Han thinks it unlikely a new entrant could replicate "even a small part of Telstra's extensive infrastructure footprint, scale, and brand power and still earn a suitable long-term return on capital".

Plenty of fat to trim

According to Han, this is reflected in Telstra's labour cost/sales ratio of 19.8 per cent, versus a global average of 14.9 per cent, equating to $1.3 billion upside just from cutting staff expenses to the peer average.

He believes more than half the earnings gap NBN inflicts on Telstra can be filled with productivity gains and cost reductions.

A $1.5 billion cost reduction program is almost half-completed, and Han also notes Telstra has prior form in successfully cutting costs.

"Granted, these past productivity gains may well have been low-hanging fruit, and sceptics may argue that future benefits could be harder to extract," Han says.

"However, we firmly believe Telstra is still fundamentally a large, bureaucratic organisation ripe for further material efficiency and productivity improvements, driven by utilisation of digital technology, data analytics, and customer self-service tools."

More from Morningstar

• 7 stock standouts from APAC hit list 

• Budget 2018: What it means for Aussie investors 

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

 

Glenn Freeman is senior editor of Morningstar Australia.

© 2018 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 'class service' have 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. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. 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 A

is senior editor for Morningstar Australia

© 2020 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 'class service' have 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. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. 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