Some would label it Australia’s biggest disappointment. After being slammed by the NBN rollout, Telstra now faces its next biggest challenge - 5G. So, is now the time for Telstra to return to its former glory? 

"We can see an opportunity for Telstra to return to growth and restore confidence in it as an investment for people who want that stable yield." 

In this short video, Michael Maughan of Nikko AM shares why he believes there are indicators in the market suggesting that Telstra has an opportunity to return to growth. With reporting season fast approaching, Michael reveals why Telstra is the company he is most excited to hear about.



Transcript

Looking at reporting season, I think one of the companies that's going to be really interesting to hear from is Telstra. They're a bit like the banks in that they have been going through a period of trying to reinstill confidence in their brand and company. In creating an improved brand reputation, they've actually concerned some of the investment community that maybe they're not as focused on profits as they should be. I think it will be interesting for the market to see that this is a company where they can be a good corporate citizen and still be focused on profits.

Over a 20 year period, the Telstra performance doesn't look great, but Telstra has had some golden periods, and its last golden period was coming out of the GFC if you remember. We're talking about a period of roughly six years there under David Thodey, where the mobile business grew and they went through a transformation program. That was a really strong period for us, especially as income investors.

If we look at it more recently, they've come under pressure from mobile competition and the NBN smashing fixed line margins. If we look forward, we now get back to a three player market in the Australian mobile market, with 5G coming, so we think there can be growth there. The NBN headwind is waning, and they're going through another transformation program to take cost out of the business, which is common in a government monopoly to be going through this constantly.

We can see an opportunity for Telstra to return to growth, and restore confidence in it as an investment for people who want that stable yield and a very strong balance sheet. We think its status as a classic defensive will be restored.

I think that looking forward for Telstra, the signs are going to be just a general improvement in mobile pricing. Over the last three years, driven by Optus, mobile prices have been under a lot of pressure; people have been getting more for less, and we see a position now with everyone investing for 5G, that the ability to just sacrifice profitability for market share isn't going to be there going forward, as everyone needs to get a return on the investment they've made historically, but also the 5G investment they're going to be making over the next few years.

In the longer term, there is an opportunity for further value realisation in Telstra, if they are able to separate infrastructure assets from the retail assets. We see that as a longer term upside opportunity, rather than something we would want to pay for today.

Learn more

Michael and his team invest in 40-70 companies on the S&P/ASX200, with the primary aim of providing tax-effective income alongside the potential for capital growth. For more information, please fill in the contact form below or visit the Nikko AM website.



michael magill

It wouldn't surprise me. Even though the chart shows this as a terrible investment over the years I have been in and out a few times and done quite well. Normally I get stuck in these stocks and grind along the bottom but for once I was fleet footed.

David James

Agree with all this. I have built up my TLS holdings over the last 4 months. It's headwinds are declining (less aggressive competition, NBN), InfraCo is valuable (think Crown Castle US), it will likely win 5G mkt share due to the capex required ( > longterm accretive rev driver) and costs are successfully being pulled out (plus in FY19 TLS had $1.3bn of rental and operating lease costs, how much can they negotiate down on their retail lease portfolio rental costs in this environment? Pure upside). Coupled the above P&L drivers with a sturdy balance sheet, they are in a good position for what is really a sticky, must have service . Unsexy, but ripe to improve in an otherwise lackluster economy

Jon Barker

I cannot see how this group can improve their customer service......you cannot make contact through email, phone or by visiting stores (unless you are buying a new plan?). This is a broken business incapable of repair!

Carlos Cobelas

Telstra ? .....old dinosaur, forget it, move on

Tom Snips

Telstra selling their buildings to charter hall, large debt, NBN marketshare eroding and no writedowns in sight. Mobile landscape still quite competitive. Way better value out there, wouldn't bother with TLS.