Financial Performance Analysis Of Telstra Corporation Limited

Introduction – Description of the company

The company which has been selected here is Telstra Corporation Limited which is one of the pioneer companies in Australia. The company was formed in 1975 and has been a famous name in Australia for its telecommunication and media services. It is in the business of building and operating telecommunication towers and networks, mobile and broadband and internet services, television and other entertainment related products and services (Bizfluent, 2017). It is the largest telecommunication company in Australia and is listed on the Australian Stock exchange. It originated from the Australia Post which was a government company but the same was privatised later on. The company plans to venture into the international markets and grow thereby and furthermore also increase customer eccentricity (Alexander, 2016). The company currently employs more than 36000 employees and has an international presence with nearly 150 + subsidiaries all over the world. The main aim of Telstra is to keep the customer as the forefront and the service provided to be the fundamental objective of doing the business and therefore, the percentage of customer complaints has gone down by more than 50% in last 5-6 years. Also, the company has kept the digitization as one of its major objectives, which is evident from the increase in digital transactions over the last 5 years as the % has increased from 26% to over 60% (Belton, 2017).

1. The company currently has a shareholding of $ 4421 Mn in 2017 as compared to $ 5167 Mn in 2016. The company is having no shareholders as of now who is holding more than 20% of the total shares of the company. The maximum which a company is holding is HSBC Custody Nominees with 15.29%, J P Morgan nominees with 13.47% and rest below 10% mainly including the National Nominees Limited, Citicorp Nominees Pty Limited, BNP Paribas, etc(Bae, 2017). Therefore, based on the given data, the firm can be said to be a non family firm which has more of public shareholding. The list of shareholders having more than 5% shares is shown below:

1. The main people who are involved in the firm governance have been listed below:

• Chairman: John P Mullen
• Board Members: John P Mullen, Andrew R Penn, Craig W Dunn, Peter R Hearl, Jane S Hemstritch, Russell A Higgins, Nora L Scheinkestel, Margaret L Seale, Steven M Vamos, Trae A N Vassallo and Chin Hu Lim.
• Chief Executive Officer: Andrew Penn

Neither of the above mentioned shareholders are in the list of the shareholders holding more than 20% or 5% of the company’s total no. of shares (Boccia & Leonardi, 2016). This is indicative of the fact that the company is a non family company and the outsiders have a major stake in it. Furthermore, it is not that the shareholders having more than 5% of the shareholding are only involved in the governance of the firm, the decision regarding the company is made independently by the management of the company as per the usual general meeting and voting process.

Below is the indepth ratio analysis of the company which has been taken from the annual report of the company for the last 2 years. Some of the important ratios are mentioned below in the below table (Bromwich & Scapens, 2016).

Below is the graph movements of the share prices of the given company Telstra corporation over the last two years (Werner, 2017). The same has been compared to the All Ordinaries Index of Australia to get an idea as to where the company is going in comparison to the market. The chart below show steh prices comparison as well as the volume of the shares being dealt in the market for the given company.

Ownership-governance structure

From the above graph, it can be seen that the volume of transaction of the shares has been fluctuating in the market. At times, it has low from April 2016 to April 2017 but from there onwards, the volume of transactions in the shares increased till October 2017. It once again slowed down and became steady there onwards (Visinescu, et al., 2017). With respect to price, the share prices of the company have been in opposite direction as compared to the All Ordinaries Index. Where the index has increased over the last 2 years with small fluctuations in between, the share prices of Telstra has been going down in the last 2 years. Therefore, it can be said that the Telstra’s graph has been below the All Ordinaries Index. However, the volatility in the Telstra has been less as compared to ASX which can be seen from the graph as Telstra’s graph is much flatter than the ASX’s graph (Vieira, et al., 2017).

There may be many reasons for the change in prices of the company. The factors may be internal or external, those affecting the company or the industry as a whole. These factors may be systematic as well as unsystematic. Some of the factors which may influence the prices of the company include change in managements’ estiamtes of the sales, profits or earnings, divestiture or a new investment, merger or acquisition by the subject company, unusual write off in the books or some abnormal items, significant management changes or industry wide changes, change in the focus of company or the macroeconomic factors, impact of competitors or legal proceedings on the business, etc (Erik & Jan, 2017). In the given case, some of the recent announcements regarding Telstra include signing of the digitization deal by Rabobank with Telstra, giving a boost to the future earnings and business, leading to the boost in the share prices. Also, Telstra has ventured into the 5G business off late showing the intensity to enter into digitization. The company also entered into the cloud voice services deal with Microsoft. The company also recently announced the declaration and distribution of dividend in mid March leading a boost to the share prices. In the month of March however, the company announced the impairment of its US based intelligent video business and marked down its value to zero (Choy, 2018). On thop of this, the company also estimated the impairment charges of A$ 273 Mn against non current assets and the goodwill. This news came down as a heavy impact on the share prices leading it to fall down. The company also made an announcement on FY18 guidance for nbn by stating that the revenue will fall down and that it would cease the sales of HFC technology for the coming six to nine months which again led the share prices to fall in the period of December to January.

1. The beta for the given company Telstra Corporation Limited is currently 0.64. The beta of the industry is 0.71 which clearly shows that the volatility of the prices of Telstra Corporation is less than the market or industry(Dumay & Baard, 2017).
2. If the risk free rate of the company is 4% and the market risk premium is 6%, then the required rate of return from the companies shares’ based on the capital asset pricing model is mentioned below:

Fundamental Ratio

R = rF + (rM – rF) * Beta, where rF = risk free rate of return, rM = Market rate of return

R = 4 + (6-4) * 0.64 = 5.28%

• The company chosen here i.e., Telstra corporation can be said to be conservative investment as the same is less volatile as compared to market as well as the industry. Furthermore, the required rate of return lies in between the market return and the risk free rate of return which indicates that the investors will achieve the risk free rate of return and will be near to the market rate of return(Chron, 2017)

1. The calculation of the weighted average cost of capital as per the latest annual report and the required / estimated cost of equity capital has been shown below:

Higher WACC may be cause of worry for the management of any company(Goldmann, 2016). Furthermore, when the company is considering an prospective investment project, then the worries may multiply for the investor. It is the average rate of return of both the equity investors and the investors in debt. In other words, it is the opportunity cost of taking the risk of putting the money in the business. And, therefore, if a company’s WACC is higher, it indicates more risk associated with the company and its operations. Investors do require and wish of higher return in lieu of putting higher risk. This altogether includes cost of financing debt, cost of equity financing, interest cost on debt and required rate of return on the equity (Heminway, 2017). For a company thinking of prospective investments, it may be cause of worry as the cost of capital or expense of raising the capital will be high and there would be less savings. And, therefore, it needs to be planned well so that the actual return is higher than the WACC. Lastly, when the weighted average cost of capital goes up, the prices of the shares come down.
The debt ratio of the company for the last 2 years has been 54.9% in the year 2017 and 54.2% in the year 2016 as shown below:

As per the above table, the capital structure and composition seems to be stable and optimum it is giving it one of the least weighted average cost of capital in the industry as well as the market (Jefferson, 2017). The company has just increased the debt proportion in the last 2 years from 54.2% to 54.9%, which is under control and is not having a substantial dilution of control in the company with respect to the equity shareholders.

The company monitor its capital management with the help of the gearing ratio and for Telstra, the comfort zone ranges from 50 to 70 percent both for the year 2017 as well as 2016. Gearing ratio is calculated as the net debt divided by the total capital, where net debt is the total of interest bearing liabilities and derivative liabilities less the cash and cash equivalents(Johnson, 2017). On the other hand, the total capital is the sum total of net debt and the equities. The company do takes steps to manage and thereby reduce the the gearing ratio, some of which are it invests the excess cash available in the bank deposits or certificate of deposit, issue commercial paper, issue long term debts like the bank loans, public bonds, etc., To maintain the gearing ratio, the company has increased the proportion of debt repayments in 2017, also the debt raised was less as compared to the last year 2016. The company was not involved in any issue or buy back of the shares during the year which would have a major impact on the gearing ratio. The director’s report does give information as to why these steps are being taken and the main reason for the same is to keep the gearing ratio in control so the the capital can be effectively managed and the debt percentage in the entire capital can be kept in check.

In the year 2017, the company had a strong performance in terms of the total income, the EBITDA and the NPAT and therefore the company announced a full franked final dividend of 15.5%  per share making the total dividend declared for the year to 31%. The company also made slight changes in the dividend policy by making the payout ratio to 70-90% of the underlying earnings and to return 75 % of the net one off nbn receipts to the shareholders in the form of the special dividends over the period of time (Meroño-Cerdán, et al., 2017). The new dividend policy mentioned above has been brought in order to be in line with the nbn transition. This is moving away from the historical practice of paying of nearly 100 percent of the profits as dividends. This will be adopted from the financial year 2018 once the final dividend is given in FY 2017. With the implementation of the new dividend policy, the full franked dividend in FY 2018 is expected to 22 cents per share including both the ordinary and the special dividend. This adjustment to the capital management has been done with the objective of giving the constant returns to the shareholders along with ensuring long term sustainability of returns for the shareholders. Though this is a material reduction in the share of dividend that the shareholders used to get  but this is more towards aligning the company with strategic transformation. This is certainly ensure success of the company in the future. Furthermore, the new dividend policy will be in line with the global peers and other large companies in the industry (Sithole, et al., 2017)

Monthly Share Price Movement for the Last Two Years

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From the above analysis and discussion done in the report for the company Telstra corporation on various aspects, we can see that the company is growing in the past few year and will certainly be a prospective venture to invest in the future. It should be a part of the investment portfolio simple because of the reasons like the gross margin has been faitly constant over the years and even the net margin increased to as high as 21.8% in the year 2016 but came down to 14.2% in 2017 by the virtue of nbn contract and the number of announcements like impairment, etc. The share prices are falling but the volatility in the share has been less as compared to the market. Thus, the profitability ratios can be said to be constant and in line with the industry margin. In terms of assets turnover ratios or simply the efficiency of the operations, the company has been performing almost constantly throughout the last 4-5 years as the total assets turnover and fixed assets turnover has remained fairly same (Knechel & Salterio, 2016). However, the debtors turnover ratio has come down to 5.2 times as compared to 5.9 times in 2015 which is a cause of worry and therefore the company needs to work on the receivables as well as strengthening the internal control. Inventory turnover has also declined dramatically over the past few years making it 17 times in 2017 from 40 times in 2012. This shows the company has not been able to convert the inventory to sales more than not. In terms of the short term liquidity however, the company has current ratio of 0.9 times and a quick ratio of 0.7 times which is line with the peers and the industry but the company needs to work to improve on the same to stabilise its position in the market (Linden & Freeman, 2017). Furthermore , the cash conversion cycle has increased from 31 days to 54 days which shows the company has not been able to receive the money on time and that is impacting its receivables and cash flow. In terms of long term solvency, the company has been doing well and effectively managing the debt equity ratio and gearing ratio which again has been fairly constant over the years and thus shows the company’s ability to pay off its debt in time. Finally, in terms of the market ratios as well, the company has performed better as the book value per share has increased and the price to book value per share has also been on the increasing trend implying the high demand for the shares.

Influence of Significant Factors on Share Price

Besides this, there are several other more positives associated with the company like the stable management, the lower rate of WACC and the major acquisitions which the company had over the past few years. The company has alos been focusing big time on the diogitization and hence the future of the company can be said to be on the positive end

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