Telecom Investment Analysis

This assignment presents a comparative financial analysis of Telstra and TPG Telecom, two major Australian telecommunication companies. Investors are advised to consider a medium-term investment strategy in telecom stocks. The analysis utilizes financial ratios, economic indicators like GDP growth and interest rates, and industry trends to determine the potential profitability of investing in either company. Telstra emerges as a potentially better investment option based on the bottom-up analysis.

Principals of Financial Markets
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Executive Summary
The purpose of the report is to provide insight into the performance of telecom industry
in Australia through using top down analysis. This report also provides specific information
about the two major players of the telecom industry. The two companies that are selected for this
purpose are Telstra Corporation and TPG Telecom. Both these company has different level of
workings in the industry. Telstra has performed better as compared to TPG Telecom in segment
like liquidity of firm, market performance and profitability analysis but capital structure of TPG
Telecom was much better than Telstra Corporation.
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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Top Down analysis..........................................................................................................................4
Australian Economic Environment..............................................................................................5
Macro-economic environment of Telecommunication Sector of Australia.................................6
Part B: Bottom up analysis of the companies selected under the same industry (Telstra and TPG
Telecom)........................................................................................................................................10
Profitability Ratio Analysis........................................................................................................14
Liquidity Analysis......................................................................................................................15
Capital Structure Ratio Analysis................................................................................................16
Market Performance...................................................................................................................17
Conclusion and Recommendations................................................................................................18
References......................................................................................................................................19
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Introduction
The present report conducts a fundamental analysis of an industry for identifying the
factors that impacts the stock movement of the companies in the industry. The fundamental
analysis mainly aims to predict the performance of an industry through examining its present and
future investment strategies. This is done to predict the economical value of the stocks of a
company in the future context by analyzing its past and present performances. The investors of a
company can conduct a fundamental analysis through examining its financial statements,
economic and technical environment. There are mainly two approaches used to carry out
fundamental analysis of a company that are, bottom-up and top-down analysis. The top-down
approach consist of analyzing the macroeconomic factors impacting the stock performances such
as GDP, currency rates, trade balances inflation and interest rates for identifying the stocks that
are performing well. This is followed by selecting the companies that have efficient assets
allocation for releasing capital gains by top-down investors. On the other hand, bottom-up
analysis analyses the microeconomic factors that have an impact on the companies in which they
are seeking to invest (Bulkowski, 2012). In this context, the report undertakes a fundamental
analysis of telecommunication industry of Australia. The top-down and bottom-up analysis of
two ASX listed companies in the industry that are, Telstra Corporation and TPG Telecom has
been done in the report.
Top Down analysis
The top-down approach in the fundamental analysis consists of analyzing the broad
economic factors that tends to influence the share prices and at last selecting a specific company
for investment purpose on the basis of the analysis. As such, this analysis is referred to as
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macro-fundamental approach because it begins at a wide level and then narrows down to
individual business level. The approach begins with analyzing the trend of macroeconomic
factors with a specific industry and then evaluating the fundamental characteristics of stocks
within that sector. This requires carrying out an extensive research on the part of top-down
investors for analyzing properly the economic environment impacting an industry performance.
This helps the investors to select the most favorable company that has an upward stock
movement in order to achieve more capital gains (Krantz, 2016).
The top-down analysis of the telecommunication industry in Australia is carried out by
analyzing the macroeconomic factors that are likely to influence its performance in the future
time-period. The telecommunication industry is estimated to contribute to about $17.4 billion to
the economic growth of the country in the recent years. The increasing need for mobile and data
services is causing the growth and development of the telecommunication sector. The level of
usage of telecommunication services is increasing at a rapid rate in the Australia with large
number of players operating within the industry. This has caused the rise of competition within
the industry and thereby impacting the trading environment of companies operating in the sector.
However, the industry is presently facing many economic challenges due to the rapid
transformation in the telecommunication sector of the country. The macroeconomic factors that
are impacting the telecommunication sector performance are technological changes, Australian
dollar strong valuation and the existing monopoly in the industry. These factors are strongly
influencing the industrial performance of the telecommunication sector and thus causing the need
for adopting strategic changes in its current operational activities (Scutt, 2016).
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Australian Economic Environment
The economic growth in Australia has been increased in the recent years with the
improved industrial performances. The country has reported an increase in its economic growth
by 0.8 per cent in the year 2016 with the increased performances of various industrial sectors
such as retail, telecommunication, mining, agriculture and forestry. The Australian Securities
Exchange is also regarded as one of the largest stock exchange in the world. The total wealth of
Australia is estimated to be about AUD $ 8.9 trillion at the end of financial year 2016 making it
one of the greatest national economies. The total GDP (Gross Domestic Product) of the country
is estimated to be about AUD $ 1.6 trillion as of the year 2017 (Australian GDP Growth Rate,
2017).
(Source: https://www.chairdigitaleconomy.com.au/wp-content/uploads/2015/12/
ITandDEPaper_vFINa.pdf)
Apart from this, the regulatory context of Australia is considered to be most favorable
and supportive and thus driving foreign investments. The inflation rate in the country is
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estimated to be about 2.7% as of the year 2017. The strong economic growth in the country is
largely contributed by the service sector that is estimated to provide employment to about 79.2 %
of the workforce diversity of the country. As per the Reserve Bank of Australia, the interest rate
in the country has been declined from 2 % in the year 2015 to 1.5% in the year 2016. However,
the interest rate is expected to rise to about 3.5% till the end of the year 2020 (Trading
Economics, 2016).
Macro-economic environment of Telecommunication Sector of Australia
The service sector also contributes about 61.1% of the total GDP of the country being
dominated by telecommunication, media and art industries. The service sector of the country is
estimated to have a hold of about 60% of the overall industrial market share. The
telecommunication sector is also showing signing of positive growth in the recent years with the
rising demand of telecommunication services among the population of the country. As such, the
companies involved in the IT sector are likely to realize good profit returns in the future context.
However, the increase in the competition in the industry will cause the players operating in the
industry to develop and provide innovative telecom product and services to their consumers. The
telecom companies need to meet the digital, broadband ad wireless technological needs of the
consumers rapidly. This requires the, to develop highly-integrated broadband telecom networks;
cloud computing and data analytic software that will help them to meet the customer
expectations (OECD, 2004).
The IT capital of Australia has increased from a $3 billion to a$ 133 billion from 1970s to
the year 2015. The total market share of IT companies as compared to the overall net stock in
Australia has shown an increase from 0.5% in 1960 to 4.5% in the year 2015. This has reflected
a strong positive economic growth in the telecommunication sector of the country facilitated by
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the development and application of new technologies in its industrials sectors. The large-scale
adoption of IT technologies is supported by the rapid increase in business investment in the
country. The large use of IT capital in the business context is due to the capability of IT
technologies to improve the production and distribution efficiency (McLean, 2013). The large-
scale increase in IT investment as compared to other investment is largely attributed to the
country transformation to a more digitalized economy. The annual IT gross fixed capital
formation has increased from a$ 1 billion in the ear 1980 to a$ 34 billion in the year 2015. The
GDP growth of the country has also become tripled during the time thus indicating the large
contribution of telecommunication sector to Australia.
(Source: https://www.chairdigitaleconomy.com.au/wp-content/uploads/2015/12/
ITandDEPaper_vFINa.pdf)
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(Source: https://www.chairdigitaleconomy.com.au/wp-content/uploads/2015/12/
ITandDEPaper_vFINa.pdf)
The large-scale technological innovations are causing the major changes in the telecom
industry of the country. The country has been recognized as highest provider of mobile
broadband services at an international level. The Telstra and TPG companies are regarded to be
prominent players in the telecommunication industry of the country. The Telstra Company is
estimated to have a hold of about 60% market share revenue in the telecommunication industry.
The company is estimated to provide services to about 16 million customers in the country. The
TPG Company is also regarded to have good growth prospects in the telecommunications sector
of the country supported by its huge economic growth and profitability. This is indicated by the
fact that its markets share has increased by 8% in the year 2015. Thus, it can be said from macro-
environment analysis of Australia that it has good growth prospect for telecommunication sector
and thus is estimated to provide good capital gains to the investors in the coming period of time
Growing (Australia’s Productive Digital Economy, 2015).
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(Source: https://www.chairdigitaleconomy.com.au/wp-content/uploads/2015/12/
ITandDEPaper_vFINa.pdf)
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Part B: Bottom up analysis of the companies selected under the same industry (Telstra and
TPG Telecom)
Bottom up analysis is referred as the micro analysis of the company. Micro analysis of
the company means interpretation of the financial statements of the company using the financial
tools such as ratio analysis, vertical and horizontal analysis of the financial statements. In this
part ratio analysis of the Telstra Corporation and TPG Telecom will be conducted to review their
financial performance.
Financial Data and calculation of Ratios
Financial Data of Telstra Corporation (Amount in Million Dollar)
Particulars 2015 2016
Net Profit $ 4,231.00
$
5,780.00
Total Assets $ 40,445.00 $ 43,286.00
Net Revenue $ 25,845.00 $ 25,834.00
Current Assets $ 6,970.00
$
9,340.00
Current Liabilities $ 8,129.00
$
9,188.00
Inventory
$
491.00
$
557.00
Prepaid Expenses
$
346.00
$
426.00
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Quick Assets $ 6,133.00
$
8,357.00
Total Debts $ 16,404.00 $ 18,227.00
Shareholder's Equity $ 14,103.00 $ 15,871.00
Profit attributable for shareholders $ 4,231.00
$
5,780.00
Earnings Per Share
$
0.34
$
0.47
Number of Equity Shares in million 12264.00 12216.00
Payout Ratio in % 79.50% 125.90%
(Annual Report 2015 and 2016, TPG Telecom) and (Annual Report 2015 and 2016, Telstra
Corporation Limited)
Financial Data of TPG Telecom (Amount in Million Dollar)
Particulars 2015 2016
Net Profit $ 224.00 $ 380.00
Total Assets $ 1,654.00 $ 3,771.00
Net Revenue $ 1,271.00 $ 2,388.00
Current Assets $ 254.00 $ 359.00
Current Liabilities $ 258.00 $ 514.00
Inventory $ 12.00 $ 24.00
Prepaid Expenses $ 18.00 $ 28.00
Quick Assets $ 224.00 $ 307.00
Total Debts $ 393.00 $ 1,488.00
Shareholder's Equity $ 1,003.00 $ 1,769.00
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Profit attributable for shareholders $ 224.00 $ 380.00
Earnings Per Share (in dollar) $ 0.55 $ 0.89
Number of Equity Shares in million 1616.00 1706.00
Payout Ratio in % 55.70% 41.90%
(Annual Report 2015 and 2016, TPG Telecom) and (Annual Report 2015 and 2016, Telstra
Corporation Limited)
Ratio Calculations
Particulars 2015 2016
Profitability Analysis
Return on assets Net Profit / Average Total Assets
Telstra Corporation 10.46% 13.35%
TPG Telecom 13.54% 10.08%
Net Profit Margin Net Profit / Net Revenue
Telstra Corporation 16.37% 22.37%
TPG Telecom 17.62% 15.91%
Liquidity Analysis
Current Ratio Current Assets /Current Liabilities
Telstra Corporation 0.86 1.02
TPG Telecom 0.98 0.70
Quick Ratio Quick Assets / Current Liabilities
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Telstra Corporation 0.75 0.91
TPG Telecom 0.87 0.60
Capital Structure
Analysis
Debt to Equity Ratio Total Debt / Shareholder’s Equity
Telstra Corporation 1.16 1.15
TPG Telecom 0.39 0.84
Equity Ratio Total Equity / Total Assets
Telstra Corporation 34.87% 36.67%
TPG Telecom 60.64% 46.91%
Market Performance
Earnings per Share
Profit attributable for shareholders / Number of
common Stock (Shares)
Telstra Corporation
$
0.34
$
0.47
TPG Telecom
$
0.55
$
0.89
Dividend per Share
Total Dividend Distributed / Number of Common
Stock (Shares)
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Telstra Corporation
$
0.36
$
0.44
TPG Telecom
$
0.14
$
0.180
(Annual Report 2015 and 2016, TPG Telecom) and (Annual Report 2015 and 2016, Telstra
Corporation Limited)
Profitability Ratio Analysis
Profitability means the income earned by the company through using the resources used
such as fixed assets and equity capital. Profitability of the Telstra and TPG will be compared in
this section to work out the income capabilities of both the firms. Following two ratios are
measured to calculate the profitability of the company.
Return on Assets (ROA): This ratio is mostly used as it predicts amount of income earned by the
company using the assets. Here assets mean total assets and income means net income earned
after tax. The ROA of the Telstra was 10.46% in year 2015 and it was raised to 13.35% in year
2016 that shows there was significant increase in the income capability of the Telstra. On the
other hand the ROA of TPG was decreased from 13.54% in year 2015 to 10.08% in year 2016
that indicates profitability position of the TPG falls in the current year (Bierman and Smidt,
2007).
Net Profit Margin: This ratio tells the percentage of profit earned on the total revenue of the
company. Every company dreams to earn maximum profits on revenue and minimize the
expenses. It has been seen from ratio analysis that Telstra has earned good amount of profit in
year 2016 as compared to TPG Telecom Limited. In year 2015, Telstra has earned profit of
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16.37% and TPG Telecom has earned profit of 17.62% in the same year. So, it can be said TPG
has earned more profit in terms of percentage as compared to Telstra in year 2015. In year 2016,
Telstra has earned profit of 22.37 % whereas TPG Telecom has earned profit of 15.61 %.
It can be concluded that profitability position of TPG Telecom was better than Telstra in
year 2015 but in year 2016, Telstra took over the lead with significant increase in profit.
Liquidity Analysis
Liquidity ratio analysis is the most important to know the short term cash position of the
company. In this analysis value of short term assets are analyzed in terms of paying capacity of
short term liabilities. Current ratio and quick ratio are the most used ratios to interpret the
liquidity position.
Current Ratio: Current ratio means amount of current assets that company has to pay the current
liabilities. Current assets means assets that can be converted into cash and cash equivalents in
one year time period and current liabilities means liabilities that are due in year time period. It is
essential for companies to maintain the current ratio of more than 1 in order to successfully
maintain the liquidity of cash in the company. Ideal ratio will be 1.5 to 2.00 because there are
some current assets that cannot be converted into cash and cash equivalent in one year period.
Current ratio of Telstra was not worst in year 2015 as it below the benchmark of 1.00 and
it was same case with the TPG Telecom also. In year 2016, the current ratio of Telstra was raised
to 1.02 that seems to satisfactory but cannot be said to be ideal. On the other hand, TPG fails to
maintain position as it was in year 2015, means the liquidity position has weaken more in current
year.
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Quick Ratio: Quick ratio is similar to current ratio but it ignores inventory and prepaid expenses
while calculating the quick assets. It is excluded because these assets do form part of cash and
cash equivalents. So it can be said that quick ratio is the most ideal ratio to calculate the liquidity
position of the company (Drake and Fabozzi, 2012).
Quick ratio should be 1.00 in order to maintain the proper liquidity of the company.
Quick ratio of Telstra was 0.75 times in year 2015 and 0.91 in 2016 that shows poor liquidity
performance of the company. It was worst case with the TPG Telecom as company there was
decline in this ratio in the current year.
It can be concluded that liquidity position of Telstra was stronger than the TPG Telecom
but it cannot be said the ideal situation for the former company.
Capital Structure Ratio Analysis
Capital means the amount invested by the company in the resources to provide facilities
for earning the income. There are mainly two types of capital, equity capital and debt capital.
Equity capital refers to the owner’s capital that does not create charge on the income of the
company. Debt capital is financed through financial institutions and it creates charge in the
income of the company. Debt equity and Equity ratio are calculated to report on the capital
structure of the company.
Debt equity ratio: Debt equity ratio is calculated by dividing debt capital to the equity capital.
Debt capital means long term liabilities that are due in more than one year time period. Equity
capital refers to shareholders funds such as issue of common shares, retained earnings and any
non controlling interests.
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Debt to equity ratio of Telstra was 1.16 times in year 2015 and it was 0.39 times of TPG
Telecom. So it can be said that capital structure of TPG Telecom was much better than Telstra as
Telstra has greater amount of debt capital as compare to equity capital. In year 2016, there was
not major change in the capital structure of Telstra Company but there was sudden increase in
debt capital in case TPG Telecom that raises the debt equity to 0.84 (Besley and Brigham, 2008).
Equity Ratio: This ratio tells the percentage of total assets is financed through the use of equity
capital. More the percentage it will be beneficial for the company. The equity ratio of Telstra was
34.87 % in year 2015 and was 36.67 % in year 2016 that indicates greater proportion of assets
was financed using the debt capital. In case of TPG Telecom the equity ratio was much greater
than the Telstra Corporation (Bull, 2007).
So it can be concluded that capital structure of TPG Telecom was better than the Telstra
as TPG does not hold much debt capital to finance the assets.
Market Performance
Earnings per share (EPS): This ratio tells amount of profit earned by the company on each
equity share. This ratio is very important from investor point of view because it tell the income
earned by the shareholder’s on their investment. EPS of Telstra was $0.34 in year 2015 and it
was increased to $0.47 in year 2016 whereas EPS of TPG was $0.55 in year 2015 which was
increased to $0.89 in year 2016.
Dividend per Share (DPS): This ratio given the amount per share that was distributed to the
shareholder’s from the current income as well as from the retained earnings. Telstra Corporation
pays good amount of dividend as compare to TPG Telecom.
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Conclusion and Recommendations
It can be inferred from the overall fundamental analysis carried in the report that
economy of Australia has strong growth prospects. The top-down and bottom-up analysis has
helped in analyzing the micro and macro-economic environment of the country for predicting its
future industrial growth. The analysis of telecommunication industry has provided the fact that
investment in the industry will be a good investment strategy for the investors. This is due to
strong growth and development achieved by the telecom market in Australia in the recent years.
Also, there is a likely trend of improved financial performance of telecom sector in the country
with continuing demand of IT related products and services among the domestic population. In
addition to this, the bottom-up analysis has shown that financial performance of Telstra is better
than TPG. However, the investors need to keep in mind that as the Australia economic growth
matures; there will be slower growth in the IT investment as businesses would have adopted all
the technological innovative products and service for improving their productivity. This can
result in the slower growth of the telecom sector and thus impacting the stock performance of the
various telecom companies. Thus, it is advised to the investors that they should plan a medium-
term investment strategy for investing the stocks of telecom companies for achieving desirable
profit returns (Dyster and Meredith, 2012). Also, the investors should invest in stocks of Telstra
over TPG for releasing good returns as indicated by the bottom-up analysis of both companies.
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References
Annual Report 2015. Telstra Corporation Limited. [Online]. Available at:
https://www.telstra.com.au/aboutus/investors/financial-information/reports [Accessed on: 18
September, 2017].
Annual Report 2015. TPG Telecom. [Online]. Available at:
https://www.tpg.com.au/about/investorrelations.php [Accessed on: 18 September, 2017].
Annual Report 2016. Telstra Corporation Limited. [Online]. Available at:
https://www.telstra.com.au/aboutus/investors/financial-information/reports [Accessed on: 18
September, 2017].
Annual Report 2016. TPG Telecom. [Online]. Available at:
https://www.tpg.com.au/about/investorrelations.php [Accessed on: 18 September, 2017].
Australian GDP Growth Rate. 2017. [Online]. Available at:
https://tradingeconomics.com/australia/gdp-growth [Accessed on: 18 September 2017].
Besley, S. and Brigham, E. F. 2008. Essentials of Managerial Finance. Cengage Learning.
Bierman, H. and Smidt, S. 2007. The Capital Budgeting Decision, Ninth Edition: Economic
Analysis of Investment Projects. Routledge
Bulkowski, T.2012. Fundamental Analysis and Position Trading: Evolution of a Trader. John
Wiley & Sons.
Bull, R. 2007. Financial Ratios: How to use financial ratios to maximize value and success for
your businesses. Elsevier.
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