When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
Telstra margins point to new phase of growth
It could be time to consider the Telstra Corporation Ltd (ASX: TLS) share price as a turnaround idea.
I have long considered Telstra as a business not worth investing in. Its margins were falling, the competitive edge was declining, growth options were limited and competition was intense.
But I think that Telstra is turning each of those points around.
Rebound of margins?
Telstra has seen its margins erode over the last few years as many homes switched onto the NBN and there was intense competition in the mobile space.
The business has been working on improving its profit by cutting costs. The telco has outlined that its financial ambition is to maintain leading operating cost metrics for a full service telco through capital expenditure and efficiency and cost reduction.
Telstra has already cut $2.7 billion of costs in its T22 strategy. It is targeting another $500 million in its T25 strategy.
The business has also guided that its net profit margin is expected to increase in the coming years. Between FY21 to FY25 it’s expecting compound annual growth of mid-single digit underlying EBITDA (EBITDA explained) growth and “high-teen” earnings per share (EPS).
5G home wireless could also be a game changer. It will take the margin back from the NBN.
Margins probably won’t go back to pre-NBN days, but it looks like it could be back on the way up.
Competitive edge improving
4G was becoming a bit of a race to the bottom when it came it to prices. There wasn’t too much difference between the services of Telstra, Vodafone and Optus (and the smaller telcos that were powered by one of those networks).
But 5G means that Telstra can get ahead again.
It’s investing to improve the customer service and experience.
The 5G network coverage is going to be extended to 95% of the population. Telstra’s regional coverage will be expanded with 100,000sqkm of new 4G and 5G coverage.
Telstra said that there will be greater access to tower assets with 250 new towers and 700 additional tenancies.
More growth potential
5G offers much more growth potential for Telstra. It could mean a higher average revenue per user (ARPU). 5G could unlock new services that need Telstra 5G services, like automated driving.
But I also like the company is investing in other businesses that can diversify the earnings and offer different avenues for growth like health tech business MedicalDirector and the Pacific telco business Digicel.
Less competition
Competition often drives down margins. But there is now less competition than there was a few years ago.
For example, Vodafone and TPG Telecom Ltd (ASX: TPG) merged together, so there may be less of a drive to offer the lowest prices there. Amaysim is no longer its own, separate business.
