TLS says no InfraCo Fixed sale in the "medium term".J. Thompson...

TLS says no InfraCo Fixed sale in the "medium term".
J. Thompson said 17.8.23

"

Telstra says it is already using artificial intelligence in a third of what it calls its key processes, including to reduce energy consumption across its network, and help answer customer questions faster. By 2025, chief executive Vicki Brady hopes AI will be used throughout the business, governed by what she describes as “strict principles around how it is used”.

Chanticleer expects it will be a long time before Brady and her top team are using AI to make big strategic decisions, but the rise and rise of this powerful technology was still a key driver of Brady’s big call to hang onto the $15 billion InfraCo Fixed business that had been flagged for possible sale.

Telstra chief executive Vicki Brady says the group’s infrastructure business is a strategic advantage. David Rowe

It was Brady’s predecessor Andy Penn who decided to establish InfraCo Fixed – which owns and operates the ducts, fibre, data centres, subsea cables and exchanges that underpin Telstra’s fixed network – as a separate entity, a move aimed at bringing a previously buried but vital part of Telstra’s business into the open to better understand whether it was worth more in the hands of Telstra or the ever-growing pool of deep-pocketed institutional investors at home and abroad.

But Brady has now pulled the plug on the potential monetisation of the business, at least for the medium term. She argues the transparency provided by separating the business has made the value of keeping the business in Telstra’s hands even clearer.

As the cloud computing wave continues to build, and is compounded by the rapid deployment of AI, Brady says demand for the InfraCo Fixed business will keep building, requiring new fibre infrastructure. That will include the intercity fibre network and submarine cable network Telstra is currently building, but Brady also says the country will need more data centres and edge computing infrastructure.

“All of that technology that’s out there needs great connectivity. We think there are further growth opportunities that we are exploring,” Brady says, adding that there may be opportunities to bring other capital providers into those investments.

Brady danced around the question of whether the higher interest rates and lower asset values weighed on the decision to retain the InfraCo Fixed business, but it’s likely to have played some role. Superannuation funds and other large investors are clearly re-evaluating the returns they are prepared to accept in a higher rate world, and particularly wary of battling over assets in big auction processes.

And while investors have lost the potential for a big capital return, InfraCo Fixed will provide support for Telstra’s cherished dividend given a big chunk of its revenue is inflation linked.

Good news for the dividend

That payout edged up 3 per cent for the 2023 financial year to 17¢, with the final dividend flat at 8.5¢. Brady was pleased with the 13.1 per cent rise in net profit to $2.1 billion, but even happier to tick off one of the key goals of the group’s T25 strategy, with underlying return on invested capital rising 1.1 percentage points to 8.1 per cent, finally back above Telstra’s cost of capital.

Telstra’s mobile business continues to be the star here, with earnings up 15.1 per cent, with price growth not disrupting customer growth too badly. There was a bit of extra churn in Telstra’s post-paid business in the second half of the year, but the rise in immigration and return of tourism meant cheaper pre-paid customer numbers were noticeably stronger. Brady says there is a shift to more keenly priced services but the fact bad debts are stable says consumers see their telecommunications spend as essential.

One looming challenge for Brady is on costs. The plan to reduce costs by $500 million by the end of the 2025 financial year remains in place, but the company says persistent inflation is making it tougher. Labour is Telstra’s biggest fixed cost, and the group’s enterprise-wide pay deal expires next October; Brady will be hoping the economy-wide wages growth we’re seeing has moderated by then.

The 2.7 per cent fall in Telstra’s share price on Thursday likely speaks to nagging cost worries".

James Thomson is senior Chanticleer columnist based in