TLS 0.51% $3.94 telstra corporation limited.

TELSTRA has MUCH FURTHER to FALL....(the reasons)

  1. 1,816 Posts.
    The equation on TLS is rather simple.

    Local, long distance, business revenue is falling as Telstra looses market share.

    Data, and internet data growth have been hyped, and are now in the late stages of growth (close to maturity).

    The only real driver of earnings (actually it's not a driver, but rather a stabiliser ie., stabilising the impact of falling revenues in TLS's other traditional telephony segments) is the mobiles division.

    The market has been betting heavily on TLS management's promises of 10% + growth in mobiles revenue.

    Is that feasible???

    IMHO, it clearly is not.

    Mobile penetration is now above 60%. Everyone who wants a mobile has now got one. There is unlikely to be growth in the total market of any significance ( any additional subscribers at this late stage are likely to be low users and v. low revenue generators).

    So, for TLS management to keep their promise of 10% + growth in mobile revenues, most, if not all will have to come from increased RPU (revenue per user).

    I see 10% growth in RPU as being VERY optimistic... it may be possible this year, but not next!

    What do i think will be the likely outcome in mobiles???


    TLS will haave a new competitor in Hutchinson next year with a technology far superior to their own. Hutchinson's 3G network will allow handsets with colour displays, high speed internet browsing, + more.

    Can you really envision a young, trendy teenager who's contract is up for renewal staying with TLS and it's old 2G, black and white technology, and old style phones... when for a slight premium (it may even be a discount) they'll be getting a colour phone with a whole host of additional features????

    The BIG assumption in my analysis about HTA is that their technology works, and has useful and fun application- this is likely.

    I estimate that by the end of 2003, HTA will have atleast 8% mobile market share.

    5% of this share will come at the expense of TLS...which means TLS's share will fall from 46% to 41%.

    A drop of more than 10% in market share!!

    In addition to the loss of market share, TLS's margins are likely to get severly compressed as they discount call rates and subsidise handsets to try and retain their customer base.

    Don't forget that the mobile business has a large fixed cost base, and a fall of 20% in revenues (10% market share loss, + 10% compression in margins) will affect the mobiles EBIT bottom line by 35% +

    ... so the segment (mobiles) that's meant to be TLS's salvation, could quite conceivable turn into the leading revenue bleeder.

    We could see TLS in late 2003, issuing an earnings update, warning of 5% + fall in group earnings!

    ... and don't expect capex (capital expenditure) cuts to save them, because they'll actually be ramping up their capex expense to build a 3G mobile network to stop the bleeding in this key division.

    TLS belwo $4.00 is a fait a compli, IMHO.

    At $4.00 it will be trading at above 13x earnings... for a company that (in my scanario described above) will be going backwards in term of profit growth.

    T3 is doomed... unless Howard and co. are prepared to sell for less than $4.00.

    All imho.
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