Telstra Corporation’s Investor Day on June 20 is a highly anticipated corporate event. It’s also a big deal for investors in general, considering that Telstra stocks are the most widely held stock in Australia.
It won’t just be this year’s dividend that interests Telstra investors. The attendees will also be eager to know the company’s plans to address this year’s drop in earnings and share value. Telstra’s shares have dropped to $2.98, the lowest since August 2011. Andy Penn, the current CEO, is expected to deliver Telstra’s strategic plan to offset the poor margins and decline in share value.
Telstra’s Sliding Performance
The CEO of Australia’s biggest telecommunications company will face the investors with the following performance issues:
- Telstra’s share price was at $6.67 when Mr. Penn took over from David Thodey as CEO in May 2015. It’s down by 51 % after three years, against a 10% gain of most shares. Shareholders lost about $46 billion.
- The rating agency S&P Global downgraded the company’s long-term issuer and issue ratings to ‘A-‘ from ‘A’ and its short-term rating to ‘A-2’ from ‘A-1’. Although the ratings still signify a “relatively stable outlook” for Telstra, they have diminished the telecom company’s position in the industry.
That’s why it’s important that the company announce some viable plans to improve earnings and consequently the shares’ value.
Penn’s Possible Strategic Options
Penn needs to demonstrate a viable plan for the country’s biggest telco. Analysts are suggesting/guessing that Penn might announce any or all of the following strategic options.
Analysts see “significant cost cutting” as a viable way to recover from losses and stay competitive. They see more cuts than Penn’s current productivity program that aims to reduce costs by $1.5 billion in three years. However, cost-cutting is not easy in Telstra where management tends to tread carefully with the high level of union membership.
Investors also want more cost-cutting details including where the cost reductions will be coming from. Reducing the annual dividend from 22 cents to about 15 cents per share is also expected to be one of the cost-cutting measures.
The analysts also saw that in the fiscal year 2017, Telstra operating expenditure was 35% of its total sales while Optus’ was 32%. The global average operating expenditure for telcos was 27%.Studies show that if Telstra reduced its operating cost to sales ratio to 32%, earnings per share may increase by 5% to 25%.
One piece of good news Penn might share is that the productivity program he introduced last August has reduced fixed costs by $249 million as of February.
Optus’ cost cutting program has reduced its operating costs from $6.44 billion in 2016 to $4.6 billion in 2018. That’s significantly more than the 1.5 billion cost cutting goals by Telstra. According to Optus CEO Allen Lew, some strategies to cut costs include reducing manpower and using apps to engage with customers.
Sell more mobile internet productswhile backing off the NBN
According to Eric Choi, an analyst at UBS, Telstra could generate more revenue by offering more mobile internet connections while bypassing the government-owned network (NBN).
TPG Telecom also plans to bypass the NBN and build its own mobile network in areas near its fixed-line customers. The coming rollout of 5G is also an opportunity to offer mobile internet products away from the NBN. More customers would choose a mobile than a fixed internet connection. Telstra would just have to sort out some issues with its agreements with NBN.
Split the company into wholesale and retail components
Investment experts suggest that Telstra Corporation be splitinto two companies. One company could continue with its infrastructure business,such as data centers, mobile towers and the remainder of its copper network. The other company would handle the retail business. Many past examples show that most companies that have split into separate companies have performed well.
Resell some of its networks for cash
Should Telstra need to spend for income-generating improvements, it can sell part of its networks for cash to finance the project.
The Future of Telstra
Would the suggested plans be enough to convince investors to hold on to their Telstra investment? We’re not sure. There could be more plans that Penn will announce during the Investor Day.
Telstra is facing a significant threats from its competitors, such as TPG’s plan to have its own network to expand its mobile internet business. With the competition for revenue heating up, Telstra will have to look internally to find ways to cut costs, as well as attempting to increase the customer base.
Realistically, Telstra will have to significantly cut its operating costs, perhaps using drastic methods such as reducing its retail stores to save on expenses. Shareholders will not be happy with the decline and unless the announcement comes with some clear, viable ways to improve revenue, Telstra management could be in some trouble with investors.