Telstra shareholders could be forgiven for thinking they were channeling gonzo journalist Hunter S Thompson, after the recent profit announcement. Hunter S said there was no way to explain the edge, because the only people who understood where it was were those who had gone over.
From the dizzy heights of T1 and T2 floats Telstra shareholders have frequently plunged into the price abyss, condemned on one hand by management, and then rescued temporarily until the next crisis by a new cabal – trust me I know what I’m doing – management apparatchiks.
Telstra’s share price in the past couple of years has mirrored that historical yo-yo pattern. It has halved from $5.00 only to begin a slow ascending price crawl back to just under $4.00. But with possibly more stygian depths ahead for shareholders to gaze into, comforted perhaps by the sustainability of a future 16 cent dividend payout – a cut of 30% on previous payouts.
The strategy for Telstra’s main core business mobiles doesn’t seem to be working with a decline in mobile revenue per user exceeding gains from new subscriptions. Although there may be some signs of a turning, there is probably more short term pain ahead. Revenue declines have been driven by competitive price discounting. Optus, the main rival has announced price increases. But they will be slow to stick.
What the latest results show is that while Telstra reported subscriber growth in both fixed-line and mobile products, there’s a broader challenge facing the company: a failure to adapt to the competitive threat posed by new entrants, such as billionaire David Teoh’s TPG Telecom which announced the rollout of a $1.9 billion mobile phone network in April last year.
Telstra is half way through a $3 billion capex initiative it commenced in 2016, to position itself as the demand for telecommunications products continues to expand.
The NBN is proving a major earnings headache for Telstra. NBN’s wholesale pricing has left it at risk of losing customers to other telco’s using high speed 5G mobile technology – challenging the $51 billion cable rollout. Wholesale broadband prices had doubled since the taxpayer-funded network was rolled out and are set to rise. The NBN is slated to be sold some time after 2021, with legislation requiring it be “built and fully operational” prior to its sale. The organisation has faced significant criticism from users, telcos and government over its stilted roll-out and “unsustainable” pricing model.
So, a best upside case for Telstra’s share price is $4.00. And that requires all the planets and stars to align. Which in Telstra’s case just doesn’t happen. A more realistic picture is the company is trading on what looks to me a relatively expensive forward p/e of around 20 times – it is assuming earnings growth. With an estimated dividend payout ratio for the next couple of years of between 72 and 85%. Does not compute. Sell.