SELL Telstra

Despite releasing a poor fullyear result, Telstra’s share price soared. Expectations were low and reality wasn’t as bad as it could have been. But Telstra’s core problem remains the same. For years it has dined on excess returns from its various businesses. Those days are over. The copper monopoly has been replaced by the NBN while competition is crimping margins in the mobile market. Earnings before interest, tax, depreciation and amortisation (EBITDA) were flat for the full year and group margins fell from 41% to 39%. Telstra’s two largest businesses – broadband and mobile – were responsible for the brunt of the decline. On a flat revenue base, operating expenses rose 7% to almost $18 billion. Telstra is targeting an aggressive $2.5 billion of cost cuts but some of that target may well be absorbed by organic cost growth. Despite $16 billion of capital expenditure over the past five years, revenue has risen just $700 million or 3%. Operating costs, by contrast, rose 25%. The dividend will be cut in half and cost inflation could be harder to fight than is generally assumed. The competition is coming and Telstra appears wholly unprepared for it. Yet Telstra can be seductive. It dominates its industry, continues to grow users and generates decent amounts of cash yet it trades on an enterprise value to EBITDA multiple of under six times. This disguises a long list of woes and we see little upside. It’s time to SELL. Gaurav Sodhi is the deputy head of research at InvestSMART.