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Is Telstra building a War Chest?

  • April 18, 2020 02:32 AM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2335 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Is Telstra building a War Chest?

TLS Going on a Borrowing Spree

Gold MTF non-AMP

Australia’s biggest telecom company, Telstra Corporation Limited (ASX:TLS) priced a €500 million bond issue, which equals to approximately $860 million, under its Debt Issuance Program Offering Circular dated 20 March 2020.

Telstra looks forward to the borrowing spree later in the current month to further fortify its balance sheet. The Notes, which have a 10-year maturity, are expected to be issued on 23 April 2020 and Telstra anticipates utilising the proceeds from the Notes for general corporate purposes including pre-funding of future debt maturities.

After assuring a further $940 million in bank facilities since the mid of March, TLS’s committed bank facilities stand at a total of $3.6 billion. Moreover, TLS believes that both the additional bank facilities as well as the bond issue, are well below the current average cost of funds for the Company.

Telstra CEO is of the view that the bond issue and the additional bank facilities exhibited the financial strength and attractiveness to global capital markets of the Company while further boosting the strong liquidity position during a volatile period in global financial markets.

Moreover, the Company’s rating as per credit rating agency S&P was reaffirmed at A- (stable) on 1 April 2020, while on the next day, Moody’s reaffirmed Telstra’s A2 (stable) credit rating. The Company is confident about its robust business during current times of high volatility.

Telstra has been actively responding to the needs of its customers during the current uncertain times. The low-cost debt facilities shall promote Telstra’s capacity to fund as well as accelerate further programs.

Currently, every kind of businesses across the globe are faced with a high level of uncertainty, given the situation of COVID-19. The lockdown imposed across domestic regions in Australia as well as across borders is anticipated to leave businesses high and dry and crippling for resources to reinstate normalcy in the business.

Measures to Curb COVID-19

The Company believes that during the current challenging times, it must maintain a strong position while undertaking a range of additional initiatives to leverage the economy.

Telstra had guaranteed to put on hold any further job reductions, and there shall be no further job reductions over the upcoming six months. Moreover, the Company has shifted its focus on the productivity program to cut down underlying fixed costs by $2.5 billion annually by the end of FY22.

In addition to this, TLS shared its intention to hire further 1,000 temporary contractors in Australia to back in managing call centre volumes.

The Company CEO, Andrew Penn, believes that the telecommunication services play a critical role in all aspects of the lives of the people as well as the economy. The current environment, that has resulted due to the restrictions arising from COVID-19, provides clarity on the same as never before.

Also, the Company has brought forward $500 million worth of capex from the 2H FY21 into CY 2020. Telstra looks forward to deploying the same to boost the capacity in its network, including further accelerating the rollout of 5G and placing much-needed investment into the economy in current times.

On the small businesses front, TLS has extended its support to small business and consumer customers who are unable to pay their bills by postponing late payment fees and disconnections until at least the end of April, beyond which the Company shall conduct a further review.

Further, TLS has also sought to extend any sponsorships for another 12 months which were expiring in the current year, offering more certainty to partners and several other causes that Telstra endorses.

What Does TLS Predict its Future to be Like?

Telstra expects a material impact on its businesses due to COVID-19. However, the extent of the impact shall be determined by the impact of the same on the economy as well as the customers. Moreover, the high volatility and unparallel uncertainty in the environment makes it quite challenging to provide an exact figure to represent the impact of the COVID-19 on Telstra’s business.

Several businesses in current scenario have been driven away from achieving their earnings guidance and have therefore withdrawn the same. However, Telstra places its current outlook within the range of its FY20 guidance announced previously during half-year results with the following expectations:

  • At the bottom end of the range for both Free Cash Flow and underlying EBITDA
  • At the bottom end of the range of $0-$500 million for growth in underlying EBITDA (excluding the in-year NBN headwind)
  • At the top end of the range for capex

The Company finds it prudent to provide for the expected additional financial impact on its business during these unprecedented times as the situation seems to not end in near term. The Company shall continue to keep a watch over the impact of COVID-19 on its business and make further upgradations as and when required.

Moreover, TLS does not entirely rely on the ascertained outlook, seeing the rapidly evolving nature of the current situation.

It is the need of the hour that big businesses recognise their responsibility towards the national interest and step-in with measures to curb the impact of the COVID-19. This is what Telstra has been doing, from devising measures to be implemented at ground level to secure funding for future needs.

This long-term perspective might help the Company to navigate through current tough times in a comparatively easier way since there is no clear visibility towards the end of this plight as we have already moved into a recession.

The TLS stock closed the day’s trade at $3.160 on 17 April 2020, up by 0.317% compared to the previous day’s closing price. The Company has a market cap of approximately $37.46 billion.

In a nutshell, businesses are struggling to maintain liquidity and are, therefore implementing unwanted measures to navigate through the crisis. Several big companies have implemented massive layoffs and stand-downs. However, Telstra emerges as a robust business with sound ability to adapt to the situation without delegating the impact of the current situation on its employees.

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