Telstra Corporation Limited: Products, Services, Financial Status, And Risk Analysis

Corporate governance structure and committees

Question:

Case Study on “Telstra Corporation Limited”.
 

Telstra Corporation Limited was founded in 1901 that is located in Melbourne, Australia. It offers the telecommunications and information services to corporations, governments, society, and people in Australia and worldwide. There are different operating channels of Telstra such as Telstra Retail, Global Enterprise and Services, Telstra Operations, and Telstra Wholesale segments. It also provides various telecommunication products, services, and solutions related to the mobiles, fixed and mobile broadband, television, data and Internet protocol networks, and network applications and services. The Telstra provides around 16.7 million retail mobile customers, 6 million fixed voice customers, and 3.1 million retail fixed data customers. It offers their services via 371 retail stores, 84 business centers, and 137 business and enterprise partners, as well as through 18,700 retail points (Bloomberg, 2015).

This report explains about the financial status and risk of Telstra by analysis of company’s historical financial statement from 2011 to 2016. Beside this, it assesses the company’s corporate governance structure, risk profile, and costs of capital and equity. It also evaluates the earnings, cash flows, competitive strengths, and analysis of its competitors. This report also focuses on the financing sources, the trade-offs between debt and equity for the company. Further, this report determines the Telstra ability to decrease the cost of debt, and its dividend policy related to the returns of the shareholders.

2.1 The Chief Executive Officer

Andrew “Andy” Penn was appointed as the Chief Executive Officer (CEO) and Managing Director of Telstra Corporation Limited in May 2015. Prior to this from 1990 to 2011, Andy worked for National Mutual which later merged with AXA Asia Pacific, and in the end as its CEO. He is passionate about the visual arts and supports Telstra’s programs with the National Gallery of Victoria, Museum of Contemporary Art and the National Aboriginal and Torres Strait Islanders Art Award (Telstra, 2015).

2.2 Board of directors:

The Telstra board currently comprises of 10 directors in which 9 directors are independent Non-Executive Direction.  They are selected by shareholders together with the Executive Director (Andy Penn). They are the responsble for setting and reviewing the strategic direction of Telstra and monitoring the implementation of that. Besides this, the Telstra board is supported by 3 further committees: an audit committee, a nominations committee, a compensation committee. In this way, each committee helps the board for accomplishing the particular tasks that set out in the committee contract, as assigned and approved by the board (Annual Report, 2015).    

The Board Remuneration Framework is designed to attract, motivate, and retain the executive team, board members and meeting shareholder requirements. Telstra grants the reward to executive directors who support management in long-term decision making. Non-Executive Director does not get the performance-based remuneration, but they receive travel benefits, allowance to 2 long hauls and 6 short haul tour each year (Telstra Corporation Limited, 2015).

Telstra financial market interactions are represented as the Error! Reference source not found. and Error! Reference source not found. from October 2011 to 2016. This chart depicts its share price, trade volumes and trends with regards to the Dow Jones Index. At the end of 2016, Telstra’s shares have been more variable due to falling its share price. For instance; share price is recorded as $3.00 in October 2011 that increases in October 2015. In opposition to this, it can be seen in chart that share price of Telstra has declined in the end of October 2015. Thus, it can be explained that Telstra shares are broadly traded in the market, with average daily stock movements in the order of 3 million (Error! Reference source not found.).

Telstra financial market interactions

As Compared to the movements of the Dow Jones Index, it can be illustrated that fluctuations in Telstra share prices are relatively parallel to the movement in Dow Jones market. It means when Telstra share’s price has declined with decline in Dow Jones index. In a similar way, when Telstra share’s prices have increased with increase in Dow Jones index (Error! Reference source not found.). Therefore, it would suggest that the performance of Telstra is closely tied to the performance of the Dow Jones market (Telstra, 2015). Following charts are explored in greater detail:

Corporate social responsibility of Telstra is designed to offer good jobs at good remuneration to people. For example; Telstra is investing on the activities of their workforce and cultural training programs.  Hence, employees will be more productive due to the most rewarding place of work. Telstra has invested $200 million over 5 years on the workforce to provide the training. It also serves as equitable respectful and diverse working environment for people. For Instance; Telstra’s Gender team has recently established the Virtual Women’s Network (VWN) to serve the network of Telstra women in order to meet their demand on a regular basis (Telstra Corporation Limited, 2015).

 It also tried to meet the needs and wants of their customers. For example, Telstra launches the Next G™ network to offer the better and more responsive services for people. This scheme is also offering in rural and remote schools in Australia to implement the appropriate and interactive program (Annual Report, 2015). In addition to this, company focused on increases the shareholder value and worked for protection of shareholder’s interests through attractive dividend payments.   

Beside this, it focuses on safe environment practices. Furthermore, it voluntarily contributes in their resources, people, technology, goods and services to sustain the community. For Instance; Telstra established the water-saving pilot program and implement into the  commercial buildings and associations in the region of Australia by the installation of modern new water-saving technologies. This technology saves 83 million liters of water annually that the equivalent of approximately 33 Olympic sized swimming pools (Telstra, 2015).  

Interest and Benefit of Telstra Directors

Telstra provides numerous benefits to its employees and its directors. Except newly joined Timothy Chen (the year 2013) all the directors of Telstra has ownership of equity. The CEO of the Telstra Mr. David Thodey has the maximum stakes in company which is around 1,009,652 shares in the financial year 2013-2014. At the time when he was CEO he received $3.4 million as a short-term cash bonus from Telstra. Even after he resigned from the post of CEO he was provided a number of benefits. For instance, later on, he received $913,577 worth of shares from the Telstra under short-term bonus plans also. Thus, Telstra not only provides various benefits to its directors when they are with the company but also provides bonus benefits even after leaving for a limited time span (Whyte, 2015).

Figure 1 : Table showing equity holdings of the directors of Telstra (Image source: Telstra annual report, 2013)

Interest and Benefit of Telstra Directors

Following is the table representing the benefits of Telstra to its directors.

Figure 2 : Benefits to directors of Telstra in the financial year 2014-2015

In Telstra, the decision making and ethical responsibility are underpinned by the corporate governance framework which comprises of various group policies and principles. Telstra laid these principles and policies of the way in which it conducts its business and ensures accountability. These policies and principles provide direction to Telstra and enable accountability to the shareholders. The code of conduct of Telstra supports the Values of the company which sets outs standard behavior of their people. This represents the commitment of Telstra for good corporate governance, their personnel, corporate environment, etc (ethical boardroom, 2014).

This governance framework allows the Telstra to keep a check on elements like health & safety, bullying, sustainability, issues related to the privacy, corruption, social media and whistleblowing. In terms of communication, Telstra is open, clear and accurate for their shareholders. The purpose of communication is conveying the relevant information as soon as possible also to understand the view of shareholders also. This enables smooth two-way communications (Telstra, 2016).

3.1 Sources of Risk for Telstra

The risk is associated with Telstra is high for the stakeholders as it is related to technology and technology is dynamic in nature. It also faces risk of a change in the customer expectations, variation in market demand; changes in the strategies of the competitor etc. There is also the presence of natural risk for the company like extreme weather conditions, natural disasters etc they can create problems for the Telstra. For Telstra, another important thing to manage is the data information of their customers and corporate. Thus, data management also poses a risk to the company. Sometimes there are unfavorable regulations by the government which can easily become the reason of underperformance resulting in the negative effect on the market share price. Thus, there is a presence of political risk also for Telstra (Telstra, 2016).

3.2 Historic Risk Parameters

Below table shows the return on equity of Telstra for five years:

Below graph shows the trend line of return on equity of Telstra from 2011 to 2015:

Capital Assets Pricing Model (CAPM) is an appropriate model for calculation of return on equity investment over stocks of Telstra. According to this, expected return on equity of an investor depends on value beta (β), the market risk premium (r_m) and the risk-free rate (r_f) (Levy, 2011). On basis of above of data related to return on equity of Telstra for five years, following tables presents the findings of regression analysis:

On basis of findings of regression analysis in above tables, the value of R Square for return over company stocks is obtained as 0.57, which means the data related to return on equity of company are closely linked with each other. Value of standard error is obtained as 1.202, which shows standard risk involved in decision related to investing company stocks. At the same time, slope of regression data can be presented by equation of “Y = 1.18X – 2345” (Levy, 2011).

Products, services, and solutions of Telstra

3.3 Valuation of Telstra

In order to determine whether the Telstra share price is over or under valued a financial comparable multiples analysis was undertaken. In this analysis the comparison of price to earnings (P/E) between Telstra and its main competitors like, Optus, Vodafone etc. Telstra is the market leader in the industry. The P/E ratio is better than in than the competitors of Telstra.

In the current scenario, the earning score for Telstra is 7.35. thus, Telstra Corporation is undervalued (capital Cuba, 2016).

Figure 3: Table representing Telstra Financials (Morningstar, 2016).
 

Figure 4: Table representing Telstra Profitability (Morningstar, 2016).

Above figures (3, 4) represents that market strength of the Telstra showing a consistent growth in growth and profitability.

Liquidity of Telstra

Figure 5: In the above table T= Telstra O=Optus V=Vodafone (Wei Xin, 2013).

With the help of above table, it can be interpreted that the liquidity ratio of Telstra is lower than the ideal ratios. That means there can be a liquidity crisis in the general situation but as Telstra is a telecommunication company ratio lower than 1 can be accepted and on the other side, when the liquidity of Telstra is compared with the other competitors in the industry the liquidity of Telstra is better. This shows better liquidity of Telstra in the industry. 

3.5 Capital Structure:

Particulars	2015  ($m)	2014 ($m)
Closing net debt	13,566	10,521
Total equity	14,510	13,960
Total capital	28,076	24,481
Gearing ratio (%)	48.3	43.0

Telstra involves both equity and debt in the capital structure. From the above, it can be depicted that closing net debt is $13,566m that is greater than the previous year’s value. Additionally, total equity is $14,510m that is higher than 2014. Besides this, total capital has risen from $24,481m to $28,076m in the period of 2014 and 2015. Along with this, the gearing ratio has risen from 43.0% to 48.3% in 2014 to 2015.

Ratios	Formula	FY15 ($m)	FY14 ($m)
Current ratio		= 0.85	=1.20
	Current assets	6,970	10,438
	Current liabilities	8,129	8,684
Quick ratio		= 0.79	= 1.16
	Current assets	6,970	10,438
	Inventory	491	362
	Current liabilities	8,129	8,684

Liquidity ratio represented the Telstra’s ability to meet its short-term financial obligations. As per the above analysis, it can be explained that Telstra’s current ratio is 0.85 and quick ratio is 0.79 in the year 2015 that are declined from the year 2014. It depicts the decreasing organizational short-term financial position.  Therefore, it can be suggested that firm should focus on enhancing their liquidity ratios by reallocating their capital in current asset and current liabilities.

Marginal Tax Rate

Tax Rate/Year	2015	2014
Tax Rate	0.29 or 29%	0.26 or 26%
Marginal Tax Rate	(0.29-0.26) = 0.03 or 3%

Marginal tax rate is the difference between the current year tax rate and previous year tax rate. As per the above calculation, it can be said that the Telstra’s marginal tax rate is 0.03 or 3%.

Recent Borrowing and Interest Rate:

Particulars /Years	2015 ($m)	2014($m)
Borrowings	1,496	2,277
Interest Rate	846	1,113

Above table depicts the Telstra’s borrowing and the interest rate that are paid by the company on its borrowings.  In this way, it can be explained that company pays a $846m interest rate on its borrowing (i.e. $1496m) in 2015. It is also determined that its borrowings and interest rate has declined as compared to the previous years. Thus, it states that company’s performance has improved than the last year’s performance.

Cost of capital to Telstra

Weighted Average Cost of Capital (WACC):

Market Value of Equity	49954.030
Market Value of Debt	13439.8755028
Cost of Debt	4.857%
Cost of Equity	5.75%
Weight of Debt	0.212
Weight of Equity	0.788
Corporate Tax Rate	30%
WACC	5.27%

WACC = E / (E + D)*Cost of Equity + D / (E + D)*Cost of Debt*(1 – Tax Rate)

Competitive strengths and analysis of competitors

0.788*5.75%+0.212*4.857 %*( 1 – 28.195%) = 5.27%

Analysis:

As per the above table, it can be said that Telstra’s WACC is 5.27% that represented the average cost of capital to company.  It is because; Telstra’s cost of debt is low as compared to its cost of equity that means the company has sufficient equity to meet its obligations.  

4.1 Analysis of Existing Investments

Accounting Return of Telstra:

Accounting return of Telstra for 2015 is $4.3b, which is presented as net income after tax of the company in Income statement. In addition to this, the accounting return is also measured in terms of gross profit, EBIT etc. The return of company can be compared with cost of equity and cost of capital of the company. The overall cost of capital is presented in terms of WACC of the company. The value of WACC of Telstra is identified as 5.27% in 2015. At the same time, earning per share is also a good measure for efficiency of utilization of company resources for generating profits. It tells about company’s ability to offer dividend to shareholders (Telstra, 2016).

4.2 Marketplace Performance

The value of accounting return provides information about proficiency of company in terms of cost control and investment of capital in profitable investment projects. For example, value of gross profit margin is helpful to measure profitability (marketplace performance) of firm as well as the cost efficiency of company. Hike in gross profit margin is also an indication of improvement in cost efficiency of company (i.e. reduction in cost of production) (Gibson, 2012).

4.3 Assessing Competitive Strengths

Sustainability of Competitive Strength:

It is a competitive strength of Telstra that it has access the multiple markets with the high-quality network that provides long-term competitive advantages to the company. There are some other companies in telecommunication sectors but they are nor capable of accessing the multiple markets. In addition to this, key market players like Vodafone and Optus have not capabilities to imitate this competitive strength of Telstra. Besides this, new market players have a lack of funds to compete with the competitive strength of the Telstra’s. 

4.4 Competitors Analysis:

There are main three competitors of Telstra includes Vodafone, virgin, and Optus.

Comparison between the Telstra and its main key competitors:

The following table represented the comparison among the Telstra and their key market players:

Company Name	Telstra	Vodafone	Optus
Quantitative Measures (Size, Profitability, and Risk)	Telstra market size is large because it provides a 4G network in most of the areas. Its net profit is $4.3b in 2015. Additionally, Telstra’s WACC is 5.75% that represents low the risk.	Vodafone cover medium market size as compared to the Telstra. Its net profit is S$3,782m in 2015. Besides this, Vodafone’s WACC is 7.4% that represents the medium risk (Vodafone, 2014).	Optus market size is small as compared to the Telstra and Vodafone. Its net profit is $5,970m in FY15. Its WACC is 8.5% that represents the higher risk (Optus, 2016).
Qualitative Measures (quality of management, and service)	It provides the best network quality to their customer. It also offers the high-quality customer services to attract and retain the more customers.	It provides less network quality as compared to the Telstra. It also facilitates the medium quality customer services.	It provides low-quality network than the Telstra and Vodafone. It also offers the low-quality customer services.

5.1 Assessing Current Financing

Methods of raising equity:

Telstra uses two methods for raising funds through equity such as initial public offering (IPO) and private placement. Telstra sells their share through IPO because it is cost effective methods. Additionally, there is no fixed burden to pay a dividend to the shareholders. Furthermore, Telstra uses private placement methods in which company offers their share to particular group of investors and institute. This is less time-consuming methods because the company sells their share in less time and utilizes funds in business at right time.

Sources of Borrowing Money:

Telstra has high portion of equity in capital as compared to the debt hence; they can use different sources for borrowing money in order to expand their business. They use two different financial sources in terms of borrowing money that are bank loan and corporate bonds.

Financing sources and trade-offs between debt and equity

Maturity structure for Debts:

Telstra has used a nine-year high-quality corporate bond rate on 30 June 2015. In addition to this, it takes a bank loan for a long period. Besides this, Telstra pays floating rate on the corporate bond while fixed rate pays on the bank loan.

Marginal Tax Rate:

Company Name/Year	FY15	FY14	Marginal Tax Rate
Telstra	29%	26%	3%
Vodafone	22%	31%	9%
Optus	15.20%	15.89%	0.69%

Debt Servicing and Debt Level:

Formula:

Debt Servicing = Operating Income/ Debt servicing obligation of the company

Debt Level:

Particulars/FY	FY15 ($m)	FY14 ($m)
Total Debt	13,566	10,521
Total Equity	14,510	13,960
Debt to Equity ratio	0.93	0.75

Interpretation:

Above table shows that company’s debt servicing is  in 2015 that is equal to its targeted value.  Hence, it can be explained that company’s ability is effective to meet the expenses of debt such as payment of principle amount of debt, and payment of interest expenses of debt. On the other side, debt to equity ratio is less than the 1 in both FY. Therefore, it can be described that company’s credit worthiness is good. In this way, it can be stated that company can use bank loan as a source of finance.

Free Cash Flows:

Particulars	FY15 ($m)	FY14 ($m)	Growth (%)
Free Cash flow	2,619	7,483	(65.0)
EBITDA	10,745	11,135	(3.5)
Fair value of Cash flow	1396	5527

As per the above table, it can be interpreted that free cash flow, EBITDA, and fair value of cash flow has declined in 2015 as compared to the previous year. Therefore, on the basis of given analysis, it can be said that Telstra is not making good investments recently.

Responsibilities of managers towards the stockholders:

Managers are responsible for assessing the net profit after tax. Therefore, they make the policies and guidelines to increase the net profit. In addition to this, manager’s mainly work for the interest of shareholders. It is because; if net profit will be increased then the company will be able to pay a higher dividend to the shareholders.

5.3 Financing Cost of Debt

There are different sources that are available to bondholders to assess the equity shareholders. These sources can be an annual report, the decision of general meeting, share movement in the market, and market information.

Investment Forecasting:

Telstra uses several modes such as board meeting and assesses future plan in order to forecast the investment opportunities, future investment, and needs. In this way, it can be said that company organizes the board meeting where all board member gives their opinion to grab the future investment opportunities.

Assets of Telstra:

Telstra uses various intangible assets such as goodwill, software assets, mastheads, patents and trademarks, licenses, customer bases, brand names, and deferred expenditure. The total value of intangible of Telstra has increased from 12659 to 15764 in 2015. Besides this, the cost of these assets has also increased from 6277 to 6432 from 2014 to 2015.

6.1 Historical Dividend Policy Analysis

Historical Dividend of Telstra

Analysis:

As per the historical performance, it can be explained that total dividend has increased in 2014 and 2015 that was constant in last three years. In this way, it can be expressed that dividend paid per share is $28.0m in FY11, FY12, FY13 that has risen $28.5m in FY14 and 30.0 in the FY15. Therefore, it can be said that dividend has continuously increased in last 2 years.

Telstra ability to decrease the cost of debt and dividend policy

Payout Ratio and Dividend Yield Ratio:

It is calculated as follow:

Particulars	2014 ($m)	2013($m)
Dividend Payout Ratio	86	93
Dividend Yield Ratio	6.0%	7.0%

Above dividend payout ratio defines the portion of profit that is distributed as the dividend to the shareholders. On the basis of above dividend payout ratio, it can be explained that dividend has declined as compared to the last years that means company’s performance is not good. On the other side, dividend yield ratio defines the amount of cash dividend which is distributed to the common shareholders and it is also relative to the market value per share. In this way, it can be said that it has declined as compared to 2014. Therefore, Telstra needs to improvement in the dividend policy.

Relation of the dividend with the earnings and cash flows:

Particulars	FY15 ($m)	FY14 ($m)	FY13 ($m)	FY12 ($m)
Dividend	30.0	28.5	28.0	28.0
Earnings	26607	26296	24776	25503
Cash Flows	1396	5527	(1502)	1291

From the above table, it can be determined that there is a positive relationship between the earnings and dividend. It is because; earnings and dividend both are reciprocally increased. On the other side; there is no relationship among the cash flows and dividends. It is because; the company uses dividend policy according to their own decisions.

Modes of Convey Information to the financial market

There are different sources of conveying information to the financial market includes the annual report, media communication, and general meetings.

Importance of dividend policy:

A dividend policy is set the rules and guidelines that are used by the company to decide the amount of profit which will pay out to their shareholders. This policy is important for the company in order to retain and attract the more investors. Besides this, the company can invest in more sectors by using dividend policy of the company.

6.2 Firm Characteristics

Marginal Stakeholders of Telstra:

There are several stakeholders are available in the company such as directors, managers, employees, customers, and suppliers. These stakeholders take some parts of the profit according to their needs and benefits. In this way, it can be explained that some stakeholders are interested in taking dividend as a profit but, at the same time, some are interested in buying back shares. From the analysis of the annual report, it can be interpreted that Telstra buyback share is $1b whereas its total dividend per share is 30.5 cents.

Compare the firm dividend policy in telecommunication sectors

Vodafone and Optus are the main competitors of the Telstra in the telecommunication sectors. 

Company Name	FY15 ($m)	FY14($m)	FY13($m)	FY12($m)
Telstra	3545	3699	3475	3480
Vodafone	1975	3365	3193	3102
Optus	(1593.8)	(1594.2)	(1434.0)	(1434.3)

As per the above table, it can be evaluated that Telstra’s dividend is high as compared to its competitors such as Vodafone and Optus. In addition to this, it can be said that Telstra’s dividend policy is best to attract and retain the more investors whereas, its key competitors do not use appropriate dividend policy. Hence, Telstra’s dividend is higher than the market players. 

Conclusion

On basis of above, it can be concluded that CEO of Telstra is Andy Penn. CEO and board of directors of the company works positively for the interest of stockholders of company and company as a whole. It can also be concluded that capital structure of company is composed of debt financing and equity financing. It can also be summarized that debt equity ratio of company is approx 1 that means company’s creditworthiness is good. It means, company may easily obtain long term loans from banks and other financial institutions. 

References

Gibson, C.H. (2012) Financial Reporting and Analysis. USA: Cengage Learning.

Levy, H. (2011) The Capital Asset Pricing Model in the 21st Century: Analytical, Empirical, and Behavioral Perspectives. UK: Cambridge University Press.

Morningstar (2016) Telstra Corp Ltd TTRAF. 

Optus (2014) Annual Report.

Optus (2016) Annual Report.

Telstra (2014) Annual Report. 

Telstra Corporation Limited (2015) Corporate Social Responsibility.