DNR Capital’s Chief Investment Officer, Jamie Nicol discusses how Telstra (TLS) faced disruption head on and worked on new opportunities which have enabled it to be an attractive investment once again.


Well, one stock we’re investing in at present is Telstra. As you know, our style is about trying to find quality companies at attractive valuations. And when you think about Telstra, you don’t often think about it as quality in many respects, because it’s had a 20 year track record which has been pretty poor. It’s faced a lot of disruption over 20 years. Mobile phones came along and killed their fixed line business. The internet killed their trading post and the yellow pages business, NBN killed their broadband business, so it’s been a pretty rough 20 years.

But when we think about quality, we like to think about the improvement coming through. When you look at Telstra now, it’s got two core businesses. It’s got an infrastructure business, that’s your towers, your pipes. That’s a big recurring [00:01:00] revenue stream. They’ve just sold a 50% or 49% of the towers business, and they got a really good price for that. That’s a highly valuable business.

Then their other business is the mobile phones business. And while that’s competitive, there was a threat that there’d be a four player market with TPG coming in, but following the merger of TPG and Vodafone, that’s now a three player market, so there’s a lot less competition. We think there’s an opportunity for prices to continue to increase and profitability to return to that sector. And at the same time, post COVID people will start traveling and they’ll start to earn roaming revenues once again as people start traveling overseas. So the trajectory of dividends and earnings over the next three to five years looks pretty good from here and you can get it at an attractive price.

Well, I think it’s interesting to contrast Telstra to the major banks. The major banks, in the short term, look okay. They’re getting good loan growth. You have people that are taking out mortgages. They’ve got a bit of a cyclical recovery in bad debts following the depths of despair last year, so there’s some improvement coming through for banks in the short term. But the longer term outlook looks pretty challenging. There’s a lot of competition. There’s four banks all competing in the home market at present. You’ve got players like Macquarie Bank, particularly competing in the most profitable segments of the market for the majors. And the little FinTech players are coming into the market.

We’re seeing a lot of capital chasing this space. A lot of fintechs are raising money. They’ve seen the success of Afterpay and there’s a lot of money money coming after the very large profit pool that the major banks enjoy. So for us, while there’s a short term opportunity possibly, we like to think three, five year outlooks, and when we look further out, we worry about that competitive position for the major banks.