Tuesday, April 04, 2006

Telstra Corporation; TLS April 4, 2006

Market price: $13.47
Market Cap (intraday): 33.32B
Trailing P/E (ttm, intraday): 11.82
Forward P/E (fye 30-Jun-07) 1: 14.64
Price/Sales (ttm): 2.07
Price/Book (mrq): 3.44
Enterprise Value/Revenue (ttm)3: 2.60
Enterprise Value/EBITDA (ttm)3: 5.442

Profit Margin (ttm): 17.17%
Return on Assets (ttm): 12.36%
Return on Equity (ttm): 27.10%

Source: http://finance.yahoo.com/q/ks?s=TLS

Total Cash / Investments = $1.179B
Total Liabilities = $17.22B (including Account Payable)

Enterprise Value (EV)
= Market Cap + Total Liabilities – Total Cash/Investments
= $33.32B + $17.22B - $1.179B
= $49.36B

Free Cash Flow (FCF)
= Total Operating Cash Flow – Capital Expenditure
= $6.22B – $2.282B
= $ 3.938B

FCF/EV yield
= $3.938B / $49.36B
= 7.98%

Treasury yield (30-years)
= 4.56%

One investor alerted me to this company Telstra.

Telstra has plunged from about $20 per share to current price of below $14 per share in less than a year, a 30% drop. From my quick and simple analysis, Telstra seems to be an interesting company to be investigated further. Telstra’s FCF/EV yield is 7.98%, which is a lot higher than treasury yield of 4.56%. It also has good ROA and profit margin.

My major concerns are……

Although Telstra has been very profitable in the past, future profitability is difficult to judge. Telstra would be required to give rivals below-cost access to its network by new regulations. I couldn’t imagine how a company could survive if it is required to give below-cost access to its network.

Revenue from its high-margin fixed-line business, which accounts for a third of total sales, fell a faster-than-expected 7.6 per cent. From FT.com Feb 8, 2006

Cost is increasing 3X faster than revenue growth. From FT.com Feb 8, 2006


It would be much safer to invest in companies with moat. In Telstra case, moat is being eroded by regulations to provide below-cost access to rivals, and increasing competition from other telecommunication providers. Current wonderful yield may evaporate if management couldn’t reduce costs and stop customers’ defection to other companies.

I would avoid this company, and focus on other strong, dominant companies, which would provide me with good returns in a safe manner.

Having said that, if you have more knowledge and deeper understanding in telecommunication industry, and think Telstra is undervalued, please send me an email. I would love to hear and learn from you.

I love to end my article with Warren Buffett's quote..... “It is more important to say "no" to an opportunity, than to say "yes".”

All the best,
Dah Hui Lau (David)

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html

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