Telstra reports its 2015-16 full year results on August 11 and top of the list will be the anticipated capital management program the company has promised using some of the surplus generated by the sale of most of its stake in Chinese online group, Autohome for $A2.1 billion.
But according to Moody’s Investor Services the ratings group, Telstra might be better served sticking that money into debt reduction because of growing pressures from the more competitive telco sector and the NBN.
Moody’s said yesterday in a release that Telstra may have to cut its generous dividends and reduce retail prices in coming years as the NBN (National Broadband Network) takes away up to 5% of its annual revenue. That would be around $1.4 billion.
Moody’s said that Telstra will have to reduce debt to maintain its credit rating, and the best way to do that would be to hold on to more of its earnings.
There was no sign of that sort of thinking at the most recent investor day briefing in early May when the latest capital management plan was announced.
Telstra is back in the market good books and the shares hit an 11 month high last week of $5.83 and edged up by 0.1% in the wake of the Moody’s comments to $5.74.
The company currently enjoys an A2 credit rating, which is reported to be one of the best in the world for big, incumbent telecommunications companies.
But Moody’s says that is at risk, (echoes of Moody’s comments about the credit ratings of our big four banks as well), if it cannot permanently fill an earnings gap of up to $3 billion caused by the NBN by finding new revenue streams and boosting existing ones.
Moody’s said NBN is paying Telstra to compensate for the loss of its wholesale business, but those payments will not be enough to totally offset the lost earnings and new access costs.
Moody’s said it expects Telstra to lose up to $700 million from selling access to its phone network to other telephone companies. And it will have to start paying NBN Co a monthly wholesale access fee, which means it no longer keeps the access fee Telstra’s retail arm pays to its wholesale arm.
Moody’s forecasts that by 2020, Telstra will have to reduce dividends to pay down debt and reduce its premium pricing to maintain market share.
It claims Telstra’s profit margin, one of the highest in the world, is expected to drop from about 42 cents in the dollar to around 30 cents once the NBN network is completed.
“We expect Telstra and its competitors will continue to offer increased data and enhanced plan options at given price points in an attempt to retain existing subscribers and win new ones,” it wrote in yesterday’s note.
"We also believe that the historical premium that Telstra has charged for access to its nationwide mobile network will remain under pressure, predominantly from Optus which is investing heavily in its mobile infrastructure, further squeezing margins."
"Based on our assumption that there will be a gap in 2020, Telstra will be able to maintain its credit metrics by reducing dividends and using that cash to pay down debt, or by applying excess cash from sources such as NBN payments and the sale of any of its non-core businesses," Moody’s suggested.
Based on the 15.5 cents a share paid for the final half of 2014-15 and the first half of 2015-16, Telstra will pay shareholders a total of 31 cents a share next month when it reveals a final payment of 15.5 cents. Cutting that will see the shares slide.
