Analysis Of Telstra Corporation Limited

Company Description

Part 1: Description of the company

Telstra is recognized as leading telecommunication and technology Company within Australia involved in providing telecommunication services.  The company was established in the year 1975 and since then has developed its competency position in providing telecommunication and information services to businesses, governments, communities and individuals. The major products and services provided by the company include markets voice, mobile and internet access and different types of entertainment products and services.  It is regarded to be the largest telecommunication company within Australia and has attained this position by providing innovating communication services to customers for improving the ways in which they live and work. It carries out its business activities by Telstra Retail, global enterprise and services, Telstra wholesale and Telstra operations segments. It provides its telecommunication products and services to businesses, governments, communities and individuals across Australia and at international level. The company listed on ASX carries out its business operations on strong purpose and values that has facilitated in promoting its growth and development (Telstra: Annual Report, 2017).

Part 2: Ownership Governance Structure

(i): Major Shareholders

As depicted from its annual report, there are no shareholders having more than 20% of the shareholdings in Telstra Corporation Limited. HSBC Custody Nominees (17.98%), JP Morgan Nominees Australia Limited (10.89%) and Citicorp Nominees Pty Ltd (5.61%) are having more than 5% of the shareholdings in Telstra. The firm can be regarded as non-family company as the major shareholders are independent entities and the shareholders are not the members of the governance team.

(ii): Main People Involved in Firm Governance

John Mullen, an independent non-executive director holds the position of the Chairman of the company since the year 2016. The Chairman is responsible for overseeing the roles and responsibilities of the Board. The below table depicts the board members of the Telstra Corporation Limited:

Name of the Board Member	Job Designation
Andrew R Penn	Chief Executive Officer & Managing Director
Craig W Dunn	Non-executive director
Peter R Hearl	Non-executive director
Jane Hemstritch	Non-executive director
Margaret Seale	Non-executive director
Russell A Higgins	Non-executive director
Nora L Scheinkestel	Non-executive director
Steven M Vamos	Non-executive director
Trae Vassallo	Non-executive director

As depicted in the above table, Andrew R Penn is the Chief executive officer and managing director of the company. It is early depicted from the board team members that they do not have any role as the major shareholders of the company (Telstra: Annual Report, 2017). The major shareholders of the company as depicted from its annual report are depicted as follows:

                                                    

                                                (Source: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF)

Part 3: Use of ratio analysis as the fundamental tool to evaluate the financial performance of the Telstra Corporation

Ratio Analysis is an important and widely used fundamental tool to assess financial performance of any entity and also to comparison of same company in different years and different companies in same years. Ratio analysis allows high level of flexibility to make financial analysis but it has some limitations that impact the quality of financial analysis (Glajnaric, 2016).

Ownership-Governance Structure

In this section ratio analysis of Telstra Corporation has been carried out for last two years and results have been presented in below table:

Financial Data used to calculate the financial ratio
Telstra Company
Amount in $ million
Financial Items	2016	2017
Current Assets	$    9,340.00	$    7,862.00
Current Liabilities	$    9,188.00	$    9,159.00
Inventories	$        557.00	$        893.00
Quick Assets	$    8,783.00	$    6,969.00
Long Term Debt	$  18,227.00	$  18,433.00
Shareholders’ Equity	$  15,871.00	$  14,541.00
Total Assets	$  43,286.00	$  42,133.00
Interest Paid	$        796.00	$        729.00
EBIT	$    7,110.00	$    2,067.00
Account Receivable	$    3,343.00	$    3,635.00
Net Profit	$    5,780.00	$    3,891.00
Net Revenue (Credit Sales)	$  25,834.00	$  25,912.00
Weighted Average number of ordinary shares (in millions)	12215.00	11968.00
Cost of Goods Sold	$    7,247.00	$  10,958.00
Dividend Paid during the year (Final and interim)	$            0.44	$            0.44

                                                                                                              (Annual Report 2017: Telstra Corporation)

Financial Ratios	Formulas	2016	2017
Short term solvency
Current ratio	Current Assets/Current Liabilities	1.02	0.86
Quick ratio	Quick Assets/Current Liabilities	0.96	0.76
Long term solvency
Debt Ratio	Long Term Debt/Total Assets	0.42	0.44
Debt to Equity Ratio	Long Term Debt/ Shareholders Equity	1.15	1.27
Times interest earned ratio	EBIT/Interest Expenses	8.93	2.84
Asset utilization
Inventory Turnover Ratio	Cost of Goods Sold/Inventory	13.01	12.27
Total Asset turnover ratio	Net Revenue/Total assets	0.60	0.62
Account Receivable Turnover ratio	Credit Sales/Account Receivable	7.73	7.13
Profitability Ratios
Net Margin Ratio	Net profit/Net Revenue	22.37%	15.02%
Return on total assets	Net profit/Total Assets	13.35%	9.24%
Return on ordinary shareholders’ equity	Net profit/Shareholder’s Equity	36.42%	26.76%
Market Value Ratios
Earnings Per Share	Net profit/weighted average number of shares	$            0.47	$            0.33
Dividend Per Share	Dividend/weighted average number of shares	$            0.44	$            0.44

                                                                                                            (Annual Report 2017: Telstra Corporation)

Part 4: Telstra Stock price and All Ordinaries Index price movement during the last two years

Section 4.1: Chart or graph reflecting the price movement of both Telstra and All Ordinaries during the last two years

Monthly data from 1 Apr 2016 to 31 Mar 2018
Date	Telstra	All Ordinaries
Monthly	Share Price	Index Price	Scale to 100
1	30/04/2016	4.68	5447.80	54.48
2	31/05/2016	4.65	5310.40	53.10
3	30/06/2016	4.83	5644.00	56.44
4	31/07/2016	4.40	5529.40	55.29
5	31/08/2016	4.51	5525.20	55.25
6	30/09/2016	4.34	5402.40	54.02
7	31/10/2016	4.40	5502.40	55.02
8	30/11/2016	4.44	5719.10	57.19
9	31/12/2016	4.36	5675.00	56.75
10	31/01/2017	4.20	5761.00	57.61
11	28/02/2017	4.06	5903.80	59.04
12	31/03/2017	3.85	5947.60	59.48
13	30/04/2017	4.02	5761.30	57.61
14	31/05/2017	3.93	5764.00	57.64
15	30/06/2017	3.75	5773.90	57.74
16	31/07/2017	3.35	5776.30	57.76
17	31/08/2017	3.38	5744.90	57.45
18	30/09/2017	3.43	5976.40	59.76
19	31/10/2017	3.32	6057.20	60.57
20	30/11/2017	3.52	6167.30	61.67
21	31/12/2017	3.56	6146.50	61.47
22	31/01/2018	3.25	6117.30	61.17
23	28/02/2018	3.14	5868.90	58.69
24	31/03/2018	3.18	6071.60	60.72

                                                                                         (Yahoo Finance, 2018: ALL ORDINARIES and Telstra Corporation)

                                                            

Section 4.2: Report that present the description on price movement Telstra Stock to all Ordinaries Index- Insight of Correlation and Volatility of the stock

On the basis of calculation made and through analyzing the graph it was found that there has been negative correlation between stock prices and All Ordinaries Index prices. The stock line of Telstra has been situated below the Index price line in the graph. The calculation of correlation between the price movements of stock price and Index price shows that they are correlated with each other by -0.80. It means when the index price goes up the stock price falls and vice versa. So it can be said that when the index price increase by 1 basis point than stock price will fall by 0.80 basis points (Higgins, 2012).

In order to test the volatility there is need to calculate the standard deviation and coefficient of variation that will provide volatility in the returns of Telstra and All Ordinaries.

Test of Volatility
Monthly	Telstra	All Ordinaries
Date	Stock Return	Index Return
30/04/2016	-0.54%	-2.52%
31/05/2016	3.78%	6.28%
30/06/2016	-8.84%	-2.03%
31/07/2016	2.62%	-0.08%
31/08/2016	-3.86%	-2.22%
30/09/2016	1.41%	1.85%
31/10/2016	0.99%	3.94%
30/11/2016	-1.96%	-0.77%
31/12/2016	-3.60%	1.52%
31/01/2017	-3.32%	2.48%
28/02/2017	-5.08%	0.74%
31/03/2017	4.27%	-3.13%
30/04/2017	-2.27%	0.05%
31/05/2017	-4.65%	0.17%
30/06/2017	-10.49%	0.04%
31/07/2017	0.91%	-0.54%
31/08/2017	1.43%	4.03%
30/09/2017	-3.11%	1.35%
31/10/2017	5.83%	1.82%
30/11/2017	1.10%	-0.34%
31/12/2017	-8.72%	-0.48%
31/01/2018	-3.30%	-4.06%
28/02/2018	1.27%	3.45%
31/03/2018
Standard Deviation or Volatility	0.043	0.025
Average Mean	-1.57%	0.50%
Coefficient of variation	-2.73	4.99

In order to test the volatility in returns provided by stock and index, standard deviation is used as the best measure. Standard deviation itself does provide the exact position of volatility so there is need to calculate the coefficient of variation. If coefficient of variation is greater than 1 it means stock returns are highly volatile and in case if coefficient of variation is less than 1 or negative than it means stock return are less volatile. On the basis of calculation it has been found that stock return of Telstra are very less volatile and it has less risk return tradeoff. On the other hand All Ordinaries has coefficient of variation of 4.99 that clearly indicates return provided by it is highly volatile and it also provide better return with very high risk (Elton, Gruber, Brown, and Goetzmann, 2009).

Fundamental Ratios

Part 5: Research Regarding the Financial or Business Publications

Telstra and Microsoft Partnership for Delivering Cloud Voice Services in Australia

The company has launched Telstra Calling for Office 365 for developing a partnership with Telstra and Microsoft and providing voice calling services from the Microsoft cloud. The program has been launched with the initiative of making it easier for the customers to connect through providing them interactive apps such as video conferencing and broadcast capabilities (Telstra and Microsoft partner to deliver cloud voice services in Australia, 2018).  

Telstra muru-D program invests in the future of human mobility

Telstra is seeking to invest in the development of new aircraft technology in order to completely transform the transport facilities and proving to be largely beneficial for the people in the event of occurrence of emergency conditions. As such, the company is actively involved in the development of a world-leading Verti-plane that is regarded to be an aircraft that flies efficiently in comparison to a helicopter and plane (Telstra Media Release, 2018).

Launching of Telstra Go Repeater

The company has also recently made announcement regarding the launching of its Go Repeater that is attributed to be an intelligent antenna solutions specifically designed for improving mobile coverage for regional customers. The company has incurred an investment of about $2.2 billion for the development of its regional mobile network (Telstra launches Telstra Go Repeater, 2018).

Acquisition of UK Based Technology Company 85

Telstra has announced the acquisition of Company 85, that is recognized as UK based technology service business and a leader in providing data centre , workspace and cloud security services. The acquisition is meant specifically for promoting the growth in the technology service business of Telstra. It will provide a new opportunity to Telstra for reaching to new customers and promoting its international expansions (Telstra Media Release, 2017).

Acquisition of VMtech

Telstra has also recently announced its acquisition of VMtech, that a leading Sydney based professional and managed service provider having competency in delivery and management of hybrid cloud, connectivity and security solutions. The acquisition is mainly undertaken by the company for reaching its strategic objective of increasing the growth of its network applications and services business in Australia and at international level (Telstra Media Release, 2017).

Part 6: Use of CAPM model to estimate the required rate of return of Telstra Corporation

Section 6.1: Identification of Beta of Telstra Corporation

In order to find the beta of Telstra the publish beta on Reuters has been taken. The beta of Telstra as published on Reuters is 0.64 (Reuters, 2018).

Section 6.2: Application of CAPM Model

Formula used in CAPM model: Risk Free rate + Beta* Market risk Premium

 

Required Rate of Return of Telstra
Risk Free rate of Return (Given)	4%
Market risk premium (Given)	6%
Beta of company (Reuters)	0.64
Required Rate of Return	7.84%

Section 6.3: Discussion on whether Telstra is good for the conservative investment

Conservative investment refers to investor’s strategy that helps in preservation of capital and minimizing the overall risk through using diversified and balanced portfolio. The diversified and balanced portfolio consisting of blue chip companies, large cap stock, government bonds and corporate bonds are regarded as conservative investment. Telstra Corporation belongs to top 10 highly traded companies of Australia and it falls under the blue chips companies (Blue Chip Companies, 2018). So Telstra can be regarded as the conservative investment for investors as it has been providing regular returns in from of dividend and increase in share price (FIRER, 2012).

Share Price Analysis

Part 7: Identification of Weighted average cost of capital

Section 7.1: Application of WACC

Formula to estimate the WACC:  

Point that should be taken into consideration while calculating the WACC:

• In order to compute the WACC there is find out the sources of finances used by Telstra to fund the assets. Telstra has mainly used equity and debt capital as the major source of finance.
• Value of equity capital has been taken on its market value of $   33,895.90 million (Reuters, 2018).
• Value of debt has been taken on book value as it is possible to find out the market value of debt capital. Value of debt is $   17,284.00 million
• Cost of Equity has been taken as required rate of return as computed in CAPM section above.
• Cost of debt is given in the annual report of Telstra and for year 2017 the cost of debt is 5.10% which is subject to tax rate of 30% (Brigham and Houston, 2012)

Calculation of WACC
Capital	Amount	Weights	Rate BT	Rate AT	Weighted Cost
	(in million $)		Tax Rate 30%
Debt Part	$   17,284.00	33.77%	5.10%	3.57%	1.21%
Equity Part	$   33,895.90	66.23%	7.84%	7.84%	5.19%
Total	$   51,179.90	100.00%
				WACC	6.40%

Section 7.2: Impact on higher rate of WACC on the prospective investment projects of Telstra

As WACC provides the rate at which company finance its funds either through equity capital or form debt capital. In order to collect funds to finance the prospective investments, management at Telstra have to either make funds from debt source of capital or from equity source of capital. Telstra have to pay $ 0.0640 per year for each dollar it takes form market or equity shareholders. In case company have higher WACC than the actual return than perhaps company is losing the value and there might be efficient returns available elsewhere in the market. Overall it can be said that higher WACC will lead to higher payment of interest and dividends as compared to actual return earned by the company (Deegan, 2013).

8. Capital Structure of Telstra Corporations Limited

Section 8.1: Optimal Capital Structure

The capital structure of the firm indicates the proportion of debt and equity sources of finances maintained for conducting its business activities. The cost pfd bet of Telstra Corporation Ltd is significant lower as compared with the equity cost indicating that the company must incorporate the sue of higher proportion of debt in its capital structure (Borio, 2014). The debt ratio of the company calculated for the financial years 2016 & 2017 has revealed that it has the long-term debt on the company has increased from 0.42 to 0.44. Thus, as the company is using more debt in its capital structure which indicates that it has maintained an optimal capital structure which will cost significantly lower for the company  (Telstra: Annual Report, 2017).

Section 8.2: Impact on Gearing Ratio

There is an increased in the long-term debt capital employed by the company as proceeds from borrowings in the year 2017 are $4,710 million while repayment is $4,571 million only. This indicates that the company is utilizing debt in capital structure for financing its business activities. This can be regarded as good for the company as cost of debt is lower so it will have a positive impact on its profitability position  (Telstra: Annual Report, 2017).

Part 9: Dividend Policy

The company has adopted major changes in its dividend policy of paying almost 100 per cent of the profits earned. The company at present has maintained an ordinary payout ratio of 70 to 90 per cent as per its global competitors. The company is also emphasizing to pay fully franked dividend to its shareholders from the financial year 2018. The company expects total dividend to be 22 per cent per share fully franked that includes both ordinary and special dividends. The dividend policy maintained by the company aims at provided consistent return to shareholders and also ensuring its long-term growth as per its strategic objective (Telstra: Annual Report, 2017).

Announcements

Part 10: Recommendation Report

Letter to Client,

Telstra Corporation Limited has maintained a strong corporate governance structure. The board members carries out their roles and responsibilities in an efficient manner as reflected from its ownership-governance structure.  The major shareholders of the company are individual business entities and thus the board members do not possess any shareholding in the company. Also, the recent news reading the company have reflected its potential of future growth as it is involved in taking new business initiative and acquiring new companies for promoting its potential growth.

This is to inform you that financial performance of Telstra has average financial position during the last two years. It can be said because ratio analysis clearly depicts that financial position and financial performance has not up to the mark during the last two years. Liquidity position of the Telstra has been reduced in year 2017 as compared to year 2016 that indicates that there has been reduction in the current assets as compared to current liabilities. Company maintains very high debt equity ratio that depicts higher percentage of debt capital as compared to equity capital. There was major reduction in times interest earned ratio that shows that ability of company to pay the interest on debt capital has been reduced. Overall profitability position has been decline in year 2017 as compared to year 2016 (Brealey, Myers and Marcus, 2007).

This report is carried out in context of providing financial assistance to a wealthy investor regarding the investment in a selected company listed on ASX. The financial assistance is provided on the basis of analysis of financial performance of the company. The financial performance analysis is carried out on the basis of the performance ratios that are, liquidity, and profitability, solvency and market ratios. The calculation of the ratios has facilitated in assessing the performance of the company at present and therefore providing a prediction of its future growth potential. Also, the calculation of weighted average cost of capital has facilitated in gaining an insight into the type of capital structure mainlined by the company. The debt ratios and the beta calculation have also provided an assessment of the financial risk associated with the company. At last, the report has provided a letter of recommendation for the investors to guide their investment making decisions in the company. The selected company for carrying out the overall report is Telstra Corporations Limited.

References:

Annual Report 2017. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF [Accessed on: 22 May, 2018].

Blue Chip Companies. 2018. Australia blue chips Australian Securities Exchange. [Online]. Available at:  https://www.bluechiplist.com/blue-chip-stocks/australia-blue-chips/ [Accessed on: 22 May, 2018].

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw Hill, New York.

Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Elton, E.J., Gruber, M.J., Brown, S.J., and Goetzmann, W.N. 2009. Modern Portfolio Theory and Investment Analysis. John Wiley & Sons.

FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition. Berkshire.McGraw-Hill Companies, Inc.

Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Reuters. 2018. Telstra Corporation. [Online]. Available at: https://www.reuters.com/finance/stocks/overview/TLS.AX [Accessed on: 22 May, 2018].

Telstra and Microsoft partner to deliver cloud voice services in Australia. 2018. [Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-and-Microsoft-partner-to-deliver-cloud-voice-services-in-Australia [Accessed on: 22 May 2018].

Telstra launches Telstra Go Repeater. 2018. [Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-launches-Telstra-Go-Repeater-coverage-solution-designed-for-regional-customers [Accessed on: 22 May 2018].

Telstra Media Release. 2017. [Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-acquires-leading-hybrid-cloud-service-provider-VMtech [Accessed on: 22 May 2018].

Telstra Media Release. 2017. [Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-acquires-UK-based-technology-services-provider-Company85 [Accessed on: 22 May 2018].

Telstra Media Release. 2018. [Online]. Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstras-muru-D-program-investing-in-the-future-of-human-mobility [Accessed on: 22 May 2018].

Yahoo Finance. 2018. ALL ORDINARIES (^AORD). [Online]. Available at: https://finance.yahoo.com/quote/%5EAORD/history?period1=1459449000&period2=1525113000&interval=1mo&filter=history&frequency=1mo [Accessed on: 22 May, 2018].

Yahoo Finance. 2018. Telstra Corporation Limited (TLS.AX). [Online]. Available at: https://au.finance.yahoo.com/quote/TLS.AX/history?period1=1459449000&period2=1525113000&interval=1mo&filter=history&frequency=1mo  [Accessed on: 22 May, 2018].