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Can investors put their faith in ‘Telstra2022’? Paul Rickard opines on the telco’s prospects.
Telstra CEO Andy Penn’s attempt to drum up support for the company at its Investor Day fell on deaf ears. Penn’s strategy, somewhat unimaginatively titled ‘Telstra2022’, was overshadowed by a larger than anticipated profit downgrade for FY19 and a refusal to provide guidance on the FY19 dividend.
As might be expected, some broker analysts cut their dividend forecast for Telstra from 22c in FY18 down to a range of 15c to 19c in FY19.
Telstra shares fell 4.8% on the day. After trading as low as $2.69, they finished at $2.77, down 14c. In part, this was a retracement of the run up in the share price ahead of the Strategy Day, but also reflected underlying disappointment about Management’s ability to right “the Telstra ship”.
The market is desperate for an excuse to buy Telstra but is not convinced that Penn and his team are the right people to lead it. The downgrade at the Investor Day, coming just 5 weeks after the last downgrade, shook confidence again.
Telstra has guided for FY19 EBITDA of $8.7bn to $9.4bn. Using the midpoint of $9.05bn, earnings have been slashed by more than $1.0bn compared to the revised (lower) FY18 forecast provided on May 14. And this excludes restructuring costs of $0.6bn.
Telstra has been hit by intense competition in the mobiles market. It expects overall FY19 market mobile and fixed revenue to be down by 2-3% on FY18, and mobile EBITDA to decline given trends in revenue per user and the impact of new entrant TPG on the market. Excess data fees are expected to decline as consumers switch to unlimited data plans, while headwinds from the NBN rollout will continue to impact the fixed line business.
Partially offsetting this is Telstra’s cost productivity target of $1.5bn, which is now expected to be met by the end of FY20.
But this downgrade was worse than expected, and with a dividend cut in FY19 more than a possibility, the market was in no mood to be too forgiving. And what of ‘Telstra2022’, Telstra’s new strategic plan?
‘Telstra2022’ has four strategic pillars:
The first pillar will see, amongst other things, Telstra reduce the number of customer plans from 1800 to just 20 by June 2021, the end of excess data charges, and a much improved digital experience. Telstra expects that $500m of “historic” revenue will be eliminated from the business over the next 3 years as products and plans are simplified.
The second pillar involves establishing a wholly owned standalone infrastructure business unit. It will comprise Telstra’s fixed network infrastructure assets including data centres, domestic fibre, international subsea cables, exchanges, poles, ducts and pipes. It will provide access to these assets to other Telstra business units on commercial terms, as well as services to nbnco . It is expected to have an initial workforce of 3,000, assets with a book value of $11bn, revenues of approximately $5.5bn and EBITDA of $3.0bn.
The infrastructure business will not include mobile assets including spectrum, radio access equipment, towers and some elements of backhaul fibre. Telstra sees these as being crucial to its 5G strategy and allowing it to maintain a competitive differentiation around the capability of its mobile network.
It is expected to be fully segregated by 30 June 2019. When the nbn rollout is complete, Telstra could potentially sell or spin out the infrastructure business.
In regards to organisation, Telstra plans to create an agile work environment and simplify its structure by flattening the organisation and reducing 2 to 4 layers of management. It will create a Telstra Global Business Services division for its large “back of house” processes (shared services division) and eliminate a net 8,000 jobs over the next 3 years. Overall, Telstra is targeting a reduction in labour costs of 30%.
Telstra is upping by $1bn the target for its previously announced productivity programme from $1.5bn to $2.5bn by FY22. It is targeting total costs to be flat or decline each year. It also plans to monetise $2bn of assets by the end of FY20 with the proceeds used to strengthen the balance sheet.
Telstra needed to deliver a strategy aimed at slashing costs, and in this regard, it has. Reducing headcount by a net 8,000 positions to cut payroll costs by 30% and hold overall costs for the next four years at or below FY18 levels will be no mean feat, particularly in an environment where it needs to improve the customer experience to compete. These are ambitious, but commendable targets.
The questions the market has are twofold. Firstly, can Telstra actually do it, and secondly, why has it taken so long for Management to come up with the plan? Telstra fessed up to the NBN earnings hole of more than $3.0bn over 12 months ago and intense competition in the mobiles market is not new news.
At the moment, the jury is out on whether Andy Penn and Co are the right team to lead Telstra. A market re-rating is still some way off.
For an alternative view on Telstra, click on the button below to access an interview featuring Roger Montgomery, who explains why he's bullish on the telco.