Telstra shares fall after spending splurge announced

Telstra boss Andrew Penn’s $3.3bn punt on keeping the telco on top of the pack has ­received a lukewarm welcome.

Andrew Penn is commiting Telstra to $3.3bn in spending. Picture: Stuart McEvoy

Telstra boss Andrew Penn’s $3.3 billion punt on keeping the telco on top of the pack has ­received a lukewarm welcome from analysts and is making investors decidedly uncomfortable.

A lot of extra money will be poured into the system over the next three years but analysts ­are not convinced that it will deliver growth for Telstra.

Deutsche Bank analysts Craig Wong-Pan and Peter Milliken said they were surprised by the “sudden increase” in expenditure and Macquarie ­Securities analysts said the ­immediate benefits were not apparent.

“At this stage we have taken a conservative view and not allo­cated significant upside from this spend,” Macquarie analysts said in a client note.

The telco’s shares slipped to their lowest level since June yesterday, ending 1.1 per cent weaker at $5.45, highlighting the steady downward trend in sentiment ­towards Telstra. Even with a $1.5bn share buyback on the table, the market has taken a somewhat dim view on what lies ahead for Telstra. Getting it to change its mind appears to be Mr Penn’s greatest challenge as he prepares to build the network of the future.

“I can understand his excitement but much of this extra capital expenditure appears quite defensive,” said Bruce Smith, portfolio manager at Alphinity Investment Management.

“People would probably rather see incremental money spent on new areas of growth.”

Growth is the big issue for Telstra and with most of the profit for the full year coming from the $1.6bn sale of its stake in Chinese car portal Autohome, the general market conditions for Telstra continue to tighten.

The core Telstra network will now be overhauled but Mr Smith said investors would be justified in wondering if this money should have been poured into the network before it started to show signs of weakness this year.

The seven major network outages might have had a marginal impact on Telstra’s overall customer numbers for the year but the pain will probably be more profound moving forward.

“There was a marginal impact on customer churn and net promoter score but there was very little impact on operational earnings,” New Street Research analyst Ian Martin said.

However, Mr Martin expects things to get a little more interesting by Christmas. “We are about to go into a very different environment as the next generation of smartphones come out, which are going to put even more pressure on network ­reliability,” he said.

“This is also a driver as to why Telstra feels it needs to spend more money.”

So where will the extra billions go?

More half is earmarked for ­improving network and systems to prevent the sort of breakdowns Telstra has had to deal with in ­recent months. The rest will be ­invested in the digitisation of customer-facing systems and ­improving back-office efficiency.

It may not scream growth but UBS analyst Eric Choi said that reinforcing capacity on the core network is the only way Telstra can hope to hold on to its margins and its market share.

According to Mr Choi, meeting the exponential growth in customer demand for data is the key criterion and rather than cut its prices, Telstra is investing in ­capacity in a bid to provide its ­customers more data at the same price.

For all the talk from Mr Penn about future proofing the network and preparing it for the impending 5G revolution, the capital spend is as much about shoring up Telstra’s present as it is about securing its future, Mr Martin said.

“The risks have certainly gone up for Telstra; the expectations in the market are only going to get higher and the competition will ramp up as well.”