A year into the top job and Telstra’s Vicki Brady is reshaping Telstra for the coming decade and beyond, and this means adjusting settings former boss Andy Penn had in train.
In her previous job as the telco’s chief financial officer, Brady was closely involved in the pre-Covid era planning to create a $12bn standalone unit to house all of the telco’s unglamorous and capital heavy network assets.
Shareholders voted on the creation of a new corporate structure that saw the creation of InfraCo Fixed, the business unit to oversee the company’s massive intercity fibre network, terrestrial and underwater cables, data centres as well as exchanges.
The new business came on the heels of a $2.8bn sale a year earlier of a large stake in a business that held all of Telstra’s mobile towers. It was clear the direction that the nation’s biggest telco was heading with the rest of its network.
InfraCo Fixed was structured so it too could easily be spun-off or partially sold to infrastructure-hungry super funds for a shareholder windfall.
It would also be an option for InfraCo to become the bidding vehicle for any privatisation of the NBN, although competition hurdles would mean to do this it would most likely need to be fully separated out from Telstra.
However, even in just 12 months the world is fast reassessing its long-term view around demand for data. Cutting-edge artificial intelligence tools are now within reach of not only big business but anyone with a mobile phone.
All this means that demand for data and computer processing power is growing so fast that tech companies can barely keep up. And all that data needs to travel through telco networks and fibre pipes to get to the cloud.
Brady has made it clear this is where she wants to be and has shut the door on the prospect of a sale of InfraCo Fixed – for the medium term at least. These assets are again regarded as core to Telstra’s mission.
Brady says Telstra has already seen strong demand from customers for its network infrastructure and even now these demands are fast evolving.
This is “being shaped by the shift to the cloud and rapid AI adoption” that is driving demands for data centres as well as domestic fibre and undersea cables. It also calls for edge sites to house servers, storage and network tools closer to customers.
“I think people forget doing all of these things with amazing technology, it is going to be carried over big fibre networks across the country and around the world. We can see demand continue to evolve and grow there.”
Sum of parts
InfraCo Fixed last year generated nearly $3.8bn in revenue, this was up 3.8 per cent. It represents 15 per cent of Telstra’s total revenue pool of $23.2bn but is one that is expected to underpin longer-term growth.
The creation of the sum business rather than having the parts spread through Telstra was still the right call, Brady says, as it provides better transparency of its value as a single group. And the growth potential is clearer, she says.
And even by bringing all the different operations together under a standalone infrastructure business “it’s very clear there is still more growth to come”.
Brady was talking as Telstra delivered a 13.1 per cent lift in net profit to $1.8bn. The result marked Brady’s first full year as CEO and tighter costs and improving margins is starting to show the results of the massive T22 restructuring program of recent years.
The full-year earnings lift to $8bn was helped by strong growth in mobile revenue in the wake of pricing rises and international roaming lift. Telstra also got a boost from the newly acquired Pacific-based business Digicel which helped international earnings jump 5.7 per cent.
Shareholders also saw a 3 per cent lift in dividend to 17c a share putting years of flat dividends as it adjusted to shrinking NBN payments further behind the telco. With guidance for the coming year that earnings could hit up to $8.4bn, Brady says Telstra “is now back to growth”.
There are, however, inflation headwinds coming over the horizon, which means the promised $500m in additional savings by 2025 may not be delivered in time, which has spooked investors. The need to negotiate a new workplace agreement could see staff wages – Telstra’s biggest single expense – push substantially higher if recent 4 per cent-plus annual wage deals among big banks are anything to go by. Telstra begins negotiations with unions on a new workplace deal early next year.
Seven’s surge
Ryan Stokes has held the line on dividends even through a transitional year for his ASX-listed investment house Seven Group, which he is positioning to deliver regardless of the economic cycle.
The $10bn Seven Group is the low-profile investor that has a controlling stake in the TV broadcaster Seven West Media as well as a string of companies from mining equipment major WesTrac, Coates Hire and listed companies Boral and gas play Beach.
Beyond media, Stokes has been working to build a conglomerate overseeing a portfolio of mostly industrial businesses leveraged to mining production, infrastructure construction and energy markets. The aim is to have collection businesses working around each other and through various cycles so the sum of them deliver even through tough times.
The big test though for Seven Group is coming over the next 12 months, particularly with global confidence around the Chinese economy fast crumbling. If China stumbles, Australian miners will feel the brunt.
But in an interview, Stokes says the flagship WesTrac that specialises in selling and maintaining the distinctive yellow Caterpillar haul trucks and diggers will trade through regardless of what happens inside China.
“The way to think about WesTrac and what we’re exposed to, mining is more volume and activity that drives our business, the traditional mining services companies traditionally are exposed to an investment phase where we are exposed to the production phase,” says Stokes, Seven Group’s chief executive.
“So long as Australia is exporting close to a billion tonnes of iron ore or millions of tonnes of coal from New South Wales, these are the core drivers of the opportunity for WesTrac.
“Whatever happens in China, that might play through, but we don’t see a fundamental change to the volume of activity. Price might change, but that doesn’t impact its production volume.”
At the same time, miners are planning a massive investment spend in coming years as part of efforts to upgrade their trucking fleets in the shift to electrification. This is still a few years away before it really accelerates, with Caterpillar currently trialling an electric-powered truck with BHP and Rio Tinto to see how it responds to tough Pilbara conditions.
Stokes was speaking to The Australian as Seven Group posted an 18 per cent increase in net profit to $654m for the year to end-June. Full-year dividend held steady at 46c a share, but this marks the 27th consecutive six-month profit result where dividends have either kept steady or increased. Earnings in the coming year have been guided to be in the range of high single-digit earnings growth.
‘Role for gas’
Three of Seven’s five business units are firing, largely driven by WesTrac and the rapid rebound of the long underperforming building materials supplier Boral that more than doubled earnings. Equipment hire group Coates also posted a 22 per cent jump in earnings.
Energy, which remains centred around a 30 per cent investment in Beach and Seven’s holdings of energy fields in the Browse Basin and in Victoria’s Bass Strait, was down on lower production. But Beach remains in a heavy investment phase, which Stokes is firmly backing.
He says gas remains critical to Australia’s energy transition and the shift to renewables has a long way to go, particularly on the east coast.
“All the energy suppliers will need to look at gas and other sources for the firming of their renewables. And that’s where we think our positioning in gas is going to be very important,” he says.
Beach and its partner Japan’s Mitsui have an export licence for their onshore Perth-basin field, although development remains complicated by construction delays.
Meanwhile, it was still too early to declare victory on Boral, Stokes says, with a restructure and focus on costs and margins still some way to go. But the fundamentals of Boral’s outlook remains, given it is exposed to infrastructure and housing construction.
Seven Group patiently increased its holding in Boral in recent years, emerging with a 70 per cent stake. The presence of Seven on the share registry and now Stokes as the company’s chairman accelerated a massive asset sale program and refocused the long underperforming business to manage costs and margins better. Boral’s shares have climbed more than 76 per cent since January.
“And we always saw it as a business needing to be somewhat improved. The opportunity was to drive operational improvement. That’s all playing through the results.”
johnstone@theaustralian.com.au
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