Research Note On Telstra thanks to RBS Morgan


·        Telstra’s mobile network dominance continues. The recent introduction of the iPhone 5 as yet to be measured in terms of sales but Telstra remains confident that it is well placed.

·        Telstra is expanding its LTE (Long Term Evolution) mobile network which is better known as the 4G network. Current coverage is 40% of Australia and this will increase to 70% over the next 12 months.  This provides Telstra a significant advantage over say Optus with 5% LTE coverage and VHA who have no LTE plans. Importantly for Telstra the LTE/ 4G network is twice as cost efficient as 3G (i.e. can handle double the volume of data for the same cost).

·        The National Broadband Network A$11bn of compensation is mostly locked in regardless of whether or not there is a change of government next year. Telstra receives A$4bn in compensation for disconnecting its copper customers. This will happen under an NBN or potentially FTTN (Fibre To the Node) which is the oppositions broadband strategy. Telstra receives A$5bn in infrastructure leasing payments (e.g renting cable pathway access to the house). If there is a change of government these payments would still be mostly kept as either outcome requires cable pathways.

·        The NBN deal is legally binding and not tied to a specific government party. If here is a change of government Telstra will negotiation and has a strong position to do so. Their approach is they are happy to change so long as the A$11bn compensation remains intact.

·        Content is of interest to Telstra but their expertise is in running networks and customer service. Given ACCC constraints Telstra is unlikely to be able to acquire specific content creators but will continue to do deals with content providers. For example Telstra’s AFL mobile streaming application has been very successful with nearly 1m downloads recorded to date.

·        Telstra’s high dividend yield has seen increased interest from foreign investors. Currently around 30% of Telstra is owned off shore investors relative to a maximum allowance of 35%.

Investment view  – Buy for income investors

·        Telstra remains a High Conviction buy for income investors.

·        It’s 10.6% fully franked yield and defensive earnings are attractive in a decline interest rate environment.