IML backs Telstra

4 December 2020
| By Chris Dastoor |
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Investors Mutual Limited (IML) has increased its investment in Telstra, as the telecom has weathered the major headwinds of the NBN rollout, aggressive competition from Optus and maintained its market-leading positions in all major market segments. 

Although Telstra’s share price had been “lacklustre”, improved mobile earnings due to consolidation in the sector, monetisation of some infrastructure assets and projected cashflows were expected to help maintain its dividend. 

“Despite Telstra’s mobile customer number having grown from 10 million in 2016 to almost 11 million in 2020, earnings before interest, taxes, depreciation and amortisation (EBITDA) in Telstra’s mobile division have declined by just over 20% from $4.4 billion to $3.5 billion over the same period,” IML said. 

“The main reason for this decline in Telstra’s mobile earnings, despite higher customer numbers, is due mainly to a decision made by Optus in 2017 to seek to gain market share by aggressively discounting its prices and adding inclusions such as the English Premier League soccer content.” 

To avoid losing market share, Telstra lowered prices, simplified mobile plans and cut costs to offset loss of earnings. 

“Telstra’s strategy led the company to retain its market share, while Optus’ strategy of looking to gain market share in mobile through its aggressive price tactics appear to have failed badly, as Optus underestimated Telstra’s swift reaction,” the firm said. 

Telstra had announced in November that it would split the company into three separate business: InfraCo Towers, InfraCo Fixed and ServeCo. 

InfraCo Towers will own Telstra’s 5,570 mobile towers; InfraCo Fixed will own 250,000 kilometres of fibre optic cables, 10,000 exchanges and fixed network sites, 370,000 kilometres of ducts and pipes, and Telstra’s network of subsea cables; and ServeCo would own all of Telstra’s operating businesses. 

“On our forecasts, Telstra should generate free cashflow of over 20 cents per share from FY22 onwards, which should grow, meaning that Telstra should be in a position to maintain – and look to grow – its 16 cents fully-franked dividend,” IML said. 

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