Where to now for long term investors of Telstra, page-4705

I just thought I would add a bit more than my drive by commentary and share my views on TLS, you will obviously see I am a macro guy and don’t dwell too much on smaller aspects of the business.
The reason I have gone long TLS is because the evidence suggests the stock is in a strong downtrend and I am somewhat a contrarian. There seems to be strong support at 9x earnings so in the absence of any severe earnings downgrades I think most of the downside is already priced in below $3. I am thinking the bottom of the primary trend is likely to turn out to be the 2.60 in early July and there are strong parallels to 2010 when the company last fell to these price levels.

In 2010 the market had become more competitive as the challenger telco’s attacked TLS margins (as you can see below) to grow mobile share while TLS suffered falling PSTN and fixed data revenues between 2009 and 2012 not dissimilar to the current issues surrounding the NBN migrations and the current fall off in fixed revenues.

Since market top in 2016 the biggest impact on overall EBITDA has been the combination of falling fixed revenues and the falling fixed voice and data margins on those revenues. The discussion about the falling fixed revenues and EBITDA, the NBN migration payments and the requirement to replace those EBITDA have been heavily discussed what has been less discussed is the parallels between 2011 and 2018.

Mobile EBITDA margins stalled and reversed across 2009 and into early 2011 when the 4G network was rolled out and started moving from around 33% in FY2011 to 43% in FY2017. Some of the negativity associated with TLS is the prospect of falling mobile margins compounding the issues of falling fixed margins due to competition. The issue is that as 5G is released TLS margins are going to be supported through 2018 -2022 by the strength of the TLS network as 4G buttressed mobile margins from 2012 – 2016. Can the increased margins for mobile offset the declining margins for fixed services? In 2018 mobile made up 39% of product revenue while fixed accounted for 23%, fixed margins need to decline by nearly twice as much as mobiles to bring down group EBITDA. It is also in no one’s interest to continue to push down margins on the fixed data and voice products.
I would suggest the driver for increasing margins on mobile will be the combination of cost out associated with more automation and remote operation of the network infrastructure and higher revenues trading on the premium and first mover status of the new 5G network.

I like TLS because I believe the stock has finished a strong primary down trend, has likely reached a cyclical bottom and is about to be the beneficiary of strong mobile EDITDA margin growth that will offset declining margins on the NBN. While the consumer-based growth will drive the first stage of growth to 2021, I believe a second more important undercurrent of growth will occur in the Data, IP and NAS segments for business due that will add the remaining support to earnings that will push the company in to strong earnings growth by 2022. As with the strong post 4G cycle from 2012 – 2016 I believe all the ingredients are here for a strong march out of the current trough to $5 - $6 by 2022.