Own Telstra shares? How the telco is tackling inflation pressures

The Telstra Corporation Ltd (ASX: TLS) share price has been slowly but steadily rising over the last few weeks.

It comes during a period of rising inflation but it seems the telco giant may be able to shield itself from some of these impacts.

Certainly, the last few years have been tricky for Telstra’s bottom line and profit margins.

A shift by households to the NBN has meant that Telstra no longer owns the infrastructure being used. This, in turn, means lower operating margins as the company has to compete on the same terms as every other telco that offers NBN services.

The telco industry has also had to get used to intense competition in the mobile space. However, that seems to be lessening after a series of acquisitions have reduced the number of players in the telco space. Inflation has also changed the situation to some extent.

Perhaps things may not be as bad as they seemed for Telstra.

Telstra is largely untroubled by inflation

The telco recently acknowledged that there is much uncertainty right now. But, Telstra believes there are some “natural hedges” against inflation in the business and that it is “better placed than many”.

One example is Telstra’s recurring infrastructure revenue from the NBN, which grew by 3.3% in FY22 to $930 million. This revenue is indexed to CPI inflation for the remaining average contracted period of 25 years.

However, in its infrastructure segment, Telstra acknowledged it has seen cost inflation for construction and fibre supply. However, it expects to remain within its strategic capital expenditure spending for FY23 of $350 million (including Viasat). However, “given the cost inflation and the customer demand profile”, its estimated FY26 earnings before interest, tax, depreciation and amortisation (EBITDA) will be “significantly lower than previously indicated”.

But, I believe it’s important to keep in mind that it is the ‘mobile’ division that generates the most revenue and may be the key influencer on the Telstra share price.

Within its costs, labour is one of the key expenses. It has some “protection” against inflation from a newly-reached enterprise agreement with agreed wage increases for the next two years.

There are contracts in place for some other costs that offer “some protection”.

On interest costs, hedges are in place with around 65% of its debt at fixed rates.

Price rises

Perhaps one of the most important things to note is that Telstra recently increased its prices for many customers in line with CPI inflation for its ‘in-market branded postpaid’ mobile plans and also introduced an ‘option’ to review prices annually against CPI inflation.

That results in increased prices for around 65% of postpaid mobile customers and will flow through from September. There are “different dynamics” in the other 35% of postpaid customers, and it continues to review pricing across the portfolio.

Telstra also said that with international travel back on the agenda, roaming is also expected to support growth, though “it is unclear if it will completely return to pre-COVID levels”.

In FY22, roaming EBTIDA was around 20% of the around $250 million of the pre-COVID level. For June, it was around 45%.

Telstra share price snapshot

Since the beginning of 2022, the Telstra share price has dropped around 4.3%.

The post Own Telstra shares? How the telco is tackling inflation pressures appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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