Is it safe to buy Telstra shares again?

14 Comments

1. 

   Leo Savas
   July 4, 2018 at 9:22 pm:

   A free market capitalist economy fosters competition with the claim that customers end up paying less for the product/service. What they don’t tell is that competition in a small population base such as that of Australia leads to complete destruction of a good service. Service destruction leads to lower demand/preference by users and lower profits for the service provider.
   The plethora of providers fostered by Government needs to be rationalised soon. Until this intervention occurs by Government one should not invest in Telstra or any other telecommunications company.
   There are two outcomes from competition. Cost reduction to users/consumers or total destruction of the service provider, and, as a result zero gain to the consumers. What determines the result between these two options is the Governments decisions outlined in their policy. Our current Government is ideologically extremists in their capitalist ideology and cant see their intervention providing a benefit in the telecommunication sector for the consumers or the providers.
   If one only considers the optimistic side of this ideology they will make the wrong investment decision with respect to Telstra.
   My opinion is that no one should invest in the Australian telecommunications sector until such time as the government legislates against an unlimited number of service providers in our market.

   • 

     Roger Montgomery
     July 5, 2018 at 9:29 am:

     Thanks Leo. That is a view that we know several people have articulated and I can see the logic. If Telstra was trading at 10 cents per share today, would you change your view? If the answer is yes, then there must be a price at which your argument can be usurped by the investment case. Thanks for sharing.

2. 

   Manmeet
   July 3, 2018 at 10:41 am:

   Hi Roger, David and others at Montgomerry

   How come a change of tune regarding TLS. I follow your comments on various mediums including Sky News on foxtel and clearly remember you (and others in your Co) saying TLS is a dog (or something on those lines) and valuation is well under $2.. Things have only gone backwards for TLS so why such a change in tune.. Maybe you need to share your Intrinisic Value Calculations for TLS to be fair on people who were following your commentry

   • 

     Roger Montgomery
     July 3, 2018 at 11:42 am:

     Manmeet, I am certain we have absolutely changed our tune. That can happen when a share falls 60%! You should read these two articles about Telstra, they explain why, at higher prices, we didn’t like Telstra: 1) https://rogermontgomery.com/wp-content/uploads/2015/02/Australian_20150221.pdf, and 2) https://rogermontgomery.com/chasing-dividends-often-overlooks-growth-2/ Market sentiment has shifted from being unduly optimistic about Telstra to being, we currently believe, unduly pessimistic. The blog post to which you are responding, and presumably which you have just read, answers your question about why we have changed our tune.

3. 

   Andrew Wright
   July 3, 2018 at 10:17 am:

   Hi Roger, Great article. I could not agree more. Do oyu think that VTG may gain from emerging value in TLS? I note VTG share price is looking cheap; earnings good and stable, money to grow, a healthy ROE and a yield of 12% no less. I’d be interested to hear if you agree that VTG look like good value; have I missed something?

   • 

     Roger Montgomery
     July 3, 2018 at 11:35 am:

     Our Telstra thesis is not predicated on telstra increasing its market share. That might be wrong but its helps to answer your question about our view on the prospects for other players.

4. 

   Mark Y
   July 3, 2018 at 9:14 am:

   Roger

   I’ve written before about it being a sell under but I’m leaning to an accumulate now . Transparency is still challenging but there is case for a mobile business relate like Bunnings inside WES . Execution has not been great in the past but the recent strategy day up date makes a clear statement that with the exception of mobile TLS are abandoning vertical integration to innovate around mobile.

   -market now knows dividend is likely cut they don’t know how much but that’s important as psychologically it’s been a yield story/ bond proxy.

   – growth is elusive but when you reflect on what 5G brings to the table , a range of use cases that are currently unavailable with 4G then you start building out what the mobile business will look like in future and it looks exciting. Ericsson project 10-12 IOT devices per user by 2025 so factor in Telstras current tariff plan for machine to machine and you start getting big numbers which will be high margin

   – then factor in share of NBN that moves to fixed wireless which is the first phase of 5G roll out then you have margin uplift of 10 per cent to 35 per cent for this customer segment. Telstra estimate around 15 per cent of broadband customers will become mobile only

   – Telstras investment in shoring up its subscriber base reminds me when BigPond dropped the walled garden approach to content in the fixed broadband business. The implications of this led to consolidation which resulted in TPG paying circa 10x EBIT for IINET . In Canada which was structurally separated properly with no T1 T2 or T3 share offer , 90 per cent of all wireless subscribers are with 3 operators does Australia need 5?

   – use cases like gaming true peer to peer etc

   – opportunity for Telstra to build an apps business

   Put Telstras mobile on 8x EBITDA instead of 5 which could happen once all the non core assets have been released and clarity emerges and value starts to become apparent and you have decent valuation uplift. Most analysts are building there Terminal value of a very low growth rate and on a decline EBITDA base roll forward and if that turns the other way then DCFs start to go up markedly

   Brave but worth doing the work on it

   • 

     Roger Montgomery
     July 3, 2018 at 9:46 am:

     thanks for sharing Mark.

5. 

   Justin Smith
   June 23, 2018 at 10:02 pm:

   Why buy TLS when there are better, less risky options? TLS is a dog, just like AMP! Time of course will tel,l but I reckon buying TLS will prove to be a costly mistake!

   • 

     Roger Montgomery
     June 27, 2018 at 9:13 am:

     Thanks Justin. Different opinions are what makes a market.

6. 

   Roger Montgomery
   June 22, 2018 at 11:04 pm:

   We definitely more people to share your view, sell the shares and make them even cheaper. We wouldn’t have shares to buy if there weren’t investors who disagreed. I know Elysse well and she gave Andy a thoroughly tough reception, which is fair. I believe Andy did a perfectly professional job of explaining that product simplification will be needed to permanently reduce the cost base, that price cuts will be needed to ensure they maintain their customers and market share (scale is everything in mobile telecommunications), and then investing in innovation and 5G. This reminds me of when Virgin tried to cherry pick Qantas and QAN responded (and won) by innovating, adding capacity and cutting costs. BTW we own, and have owned, SEK, REA, Apple and Facebook as well as Cochlear and CSL. Telstra represents a different type of opportunity. Of course, as always, we could be wrong!

7. 

   Herman
   June 21, 2018 at 11:51 am:

   1. Mobile is being squeezed cutthroat-style with new entrants in recent years. 5G would only provide a moat for <5yrs until Optus, TPG & an unforeseen competitor fully build their own 5G in cities. Plus, Amazon has moved into TV streaming, grocery, etc, it would be natural for it to cater for mobile too, just as Woolies & Coles did.

   2. NBN Co. wouldn't sell itself to TLS for less than its future revenues, ie. TLS won't buy NBN at any meaningful discount. Anyway, buying NBN then/before splitting TLS into two is flip-flopping, because of strict pricing regulations. Finally, NBN might need to be upgraded in 10yrs+ as other countries offer far superior speeds.

   3. Splitting TLS into asset & retail would boost short-term profits at the expense of long-term. TLS's competitive advantage has been its rural hotspots, which might be abandoned by future asset-TLS (all about cost cuttings), thus retail-TLS won't be differentiate from other providers (all about urban density).

   Positives would be significantly higher tourism & business travels (have no time to shop around, just go with the most popular/reliable choice), accelerating immigration (but might lure new competition), and perhaps other competitors self-inflicting (eg. Vodafone <2012, Optus recently albeit minor).

   We're talking about a turnaround for TLS that's been slow to react, except in cloud services. Do we believe in turnarounds? It's a gamble, despite the share price slashed in half. Cutting costs isn't good enough for a tech company in an increasingly changing world. Pass.

   • 

     Roger Montgomery
     June 22, 2018 at 10:18 am:

     Hi Herman good points.

     1. We wouldn’t suggest that Telstra wins all 5G business, but their scale means they should earn most of the margin.
     2. NBN Co.s equity is worth zero now. So who would buy it for a premium. And don’t forget both sides of politics have said they don’t want it.
     3. Infraco has no impact on valuation but does potentially provide advantages in a world where NBN Co is returned to private sector.

     Around these prices and lower, the value debate is an interesting one to have, even in a declining ebitda environment.

8. 

   Joseph Sofaer
   June 20, 2018 at 4:14 pm:

   Any comments on today’s strategy day Roger? Thanks!