From Livewire July 2018

Bullish view from Tim Kelley at the Montgomery fund.

See here

Telstra 2022

Will split of infrastructure business -- InfraCo -- which will contain Telstra's fixed network infrastructure assets including data centres, domestic fibre, international subsea cables, exchanges, poles, ducts and pipes. The new business willhave assets of $11 billion, revenue of $5.5 billion and EBIDTA of $3 billion. Will not include mobile networks assets.

Cost out program significantly lifted by $1b, for targeted $2.5b in annual savings by 2022. Will reduce staff costs by ~30%. Cut 8,000 jobs.

Will sell $2b of assets to strengthen Balance Sheet. Expected to include network infrastructure and unused telephone exchanges which sit on valuable land.

Focus on being a 'premium' brand in 5G

Will have a vastly simplified product set, and retire around 1800 legacy contracts

As of June 2018, Telstra has called for:

• FY19 income of $26.6 - $28.5 billion (FY18 expected at $27.6 - $29.5, ~3.5% drop)
• EBITDA of $8.7 - $9.4b (FY18 at lower end of $10.1 - $10.6b, a ~11% drop)
• CAPEX $3.8 - $4.4b (a ~10% drop on FY18)
• Dividend will be 70-90% of underlying earnings, and 75% of one off NBN charges

Telstra is a business facing considerable challenges, but is far from terminal.

The structural change bought about by the nbn, and the competitive pressures that has unleashed, threatens to further erode margins. Earnings will take a further hit when one-off nbn payments cease in a few years.

Nevertheless, improving productivity and significant capital investments -- particularly into 5G -- could go a long way in plugging the gap.

This is a question of whether or not you believe management can deliver on the newly announced startegy: Telstra 2022. Something that promises to make Telstra a more competitive, efficient and focused operation.

If Mr Penn’s new strategy bears fruit, and (critically) if all cost savings are fully realised, you can make the case for value. Even if the dividend is cut in the meantime.

Some further thoughts here

1. Telstra is seen by many as a 'Bond Proxy' -- so as interest rates rise, the relative attractiveness of its yield will diminish.

2. The company will not be able to fill the 'earnings hole' , and will waste capital in vain and fruitless investments

3. Added competition will further crimp margins