Telstra Corp. Ltd. Ratings Lowered To #A-/A-2# Following Weak Profitability From Intense C Outlook Stable

Stocks and Financial Services Press Releases Monday May 28, 2018 17:36
MELBOURNE--28 May--S&P Global Ratings

MELBOURNE (S&P Global Ratings) May 28, 2018--S&P Global Ratings today said it has lowered its long-term issuer and issue ratings on Australian telecommunications company Telstra Corp. Ltd. to 'A-' from 'A'. At the same time, we lowered the short-term rating to 'A-2' from 'A-1'. The outlook is stable.

The downgrade reflects our view that Telstra's strong incumbent position within the Australian telecommunications industry has diminished somewhat. Competition has intensified across Telstra's core businesses and the company has had to accept lower margins as a means of protecting its dominant market share.

The Australian mobile market has become highly competitive. In our opinion, Telstra's vulnerability to an erosion of its price premium and dominant market share has increased over the past few years despite elevated network investment. Competing mobile network operators have also made large investments in their networks and product offerings. We expect competition to further intensify with the likely entry of TPG Telecom as Australia's fourth mobile network operator.

In addition, Telstra is progressively transferring its high-margin fixed-line access network to the government-owned national broadband network (NBN) in exchange for a series of compensation payments. The majority of this compensation is likely to be returned to shareholders. The establishment of the NBN will structurally separate Telstra's fixed-line services, leaving it to compete on equal terms against a fragmented market of retail service providers.

We believe the earnings impact of migrating to the NBN is likely to be at least A$3 billion (previous guidance A$2 billion-A$3 billion). This has been exacerbated by retailers aggressively pursuing market share and onerous NBN wholesale charges. Telstra intends to fill this gap through a combination of cost savings and strategic investments.

In our opinion, there are execution risks associated with the company's strategic initiatives, including its vision of becoming a world-class technology company that empowers people to connect. We view new earning streams generated in the group's Network and Application Services division as being of generally weaker quality compared with the lost fixed-line earnings.

We continue to view Telstra's ability to generate a pricing premium from its dominant mobile network infrastructure as a key differentiator from its peers, warranting a one-notch rating uplift from its lowered anchor score.

Our base-case operating scenario assumes that a combination of cost savings and strategic investments will fill a A$3 billion earnings gap. Our base case also assumes that Telstra will size shareholder returns in a manner that is consistent with its stated balance sheet settings.

The stable outlook on Telstra reflects the company's dominant network infrastructure and our expectation that the group will adhere to its stated financial policies. The rating can accommodate marginally higher leverage in the near term for restructuring initiatives that have an enduring benefit to Telstra's earnings profile.

We could lower the rating if:
  • Telstra's fully adjusted debt-to-EBITDA ratio (including a pro rata consolidation of Foxtel and excluding any one-off net receipts associated with the NBN compensation in our EBITDA calculations) remains at more than about 2x after fiscal 2019; or
  • The competitive environment in mobile services intensifies to the extent that Telstra's ability to generate a meaningful premium pricing has substantially eroded.

We see the potential for an upgrade as unlikely in the short term given the group's structural industry challenges. We could consider an upgrade if Telstra adopts a more conservative financial policy and is able to maintain consistent cash flows from its core operations.

Latest Press Release

AEON partners with JCB to launch AEON J-Premier Platinum Credit Card to offer exclusive privileges throughout Thailand and Japan

AEON Thana Sinsap (Thailand) Public Company Limited partners with JCB International (Thailand) Co., Ltd. to launch "AEON J-Premier Platinum Credit Card" that will allow Thais to enjoy everything Japan, with exclusive privileges and offers in dining,...

China and Europe post double digit increases in RD spending

- China and Europe increase R&D spending the most as global R&D investment reaches US$782bn - 88 companies outperform industry peers on sustained financial success with modest R&D spend - Amazon retains top spot as world's largest corporate...

Photo Release: EXIM Thailand Hosts 6th Council of Specialized Financial Institutions Meeting in 2018

Mr. Pisit Serewiwattana (forth right), President of Export-Import Bank of Thailand (EXIM Thailand), welcomed Mr. Pornchai Triraveja (fifth right), Fiscal Policy Advisor of Fiscal Policy Office (FPO), and Mr. Chatchai Sirilai (fifth left), President of...

Kinesis Money and Allocated Bullion Exchange Explore Creating a Joint Commercial Blockchain Venture with Jakarta Futures Exchange in Indonesia

Today, Jakarta Futures Exchange (JFX), the leading futures and derivatives exchange group in Indonesia, have announced an expanded Memorandum of Understanding (MOU) with Kinesis Money and Allocated Bullion Exchange (ABX). The partnership will seek to...

Photo Release: SCB and Mae Fah Luang University Make Headway for Cashless Society with Smart University Program

"The Siam Commercial Bank (SCB)", the leader in digital lifestyle banking, continues to pave way for a cashless society at universities across Thailand. The partnership with Mae Fah Luang University continues its "Smart University" program. MFU App is...

Related Topics