Telstra investors pinning their hopes on Thursday's investor day being the catalyst for a share price revival will be disappointed.
While it is clearly positive for the stock that chief executive Andy Penn is moving aggressively to fill the $2 billion to $3 billion hole in earnings in 2020 caused by the NBN there is no tangible trigger for an earnings uplift in the short term.
It is possible that Telstra will use excess cash flow to fund a buyback but there will be no clarity about that until February next year.
Penn has stuck to his existing earnings guidance for fiscal 2017 which is for mid to high-single digit income growth, low to mid-single digit growth in earnings before interest, tax, depreciation and amortisation, an 18 per cent capital expenditure to sales ratio and free cash flow of $3.5 billion to $4 billion.
In other words, Telstra shares will continue to trade on their dividend yield. At the current share price, the Telstra dividend yield is 6.4 per cent or 9.1 per cent when grossed up for dividend imputation credits.
Telstra shares have fallen 15 per cent this year and are down 20 per cent from the record high of $5.95 struck in July last year.
The stock has suffered from a shift in investor preference in favour of growth stocks, a decline in the obsession for yield plays, nervousness that Penn would blow up $1 billion in an Asian consumer market expansion and longer-term concerns about the NBN earnings hole.
Penn made it crystal clear on Thursday that there would be no ambitious and risky expansion in Asia.
"The refinements in our strategy make it clear that our future investments are going to be focused on areas where we have core strengths and skills which are close to our core business," Penn said.
Penn shed more light on Telstra's $3 billion capital expenditure program in Australia on mobiles and fixed line infrastructure.
Telstra has set a target return for the $3 billion investment program which includes $1.5 billion in building networks for the future, about $1 billion in accelerating the digitisation of the business and up to $500 million in other customer experience related improvements.
The aim is to deliver run rate EBITDA benefits in excess of $500 million a year with the full benefits by June 2021.
"Of the $500 million benefit, approximately two thirds will be from additional revenue and one third from cost improvements," Penn said.
"In conjunction with our ongoing productivity program, we expect to reduce net underlying core fixed costs by over $1 billion by FY21." The capital investment in the company's mobile network is predicated on the assumption that network traffic over Telstra's fixed and mobile networks will grow five times over the next five years.
There is a possibility of capital management by Telstra next year but that will have to await a review of the company's entire capital allocation strategy "taking into consideration the long term business and financial profile of Telstra".
The six to 12 month review has many moving parts.
The company will review the best use of NBN payments in order to find to find the "most effective way of maximising long term shareholder value from its NBN cash flows".
The review will also examine long term capex post-NBN, and investment decisions including M&A; criteria and "take into consideration shareholder returns including dividends, buy-backs and other forms of return".
Penn used the investor day in Sydney to tweak the company's strategy and vision.
The company's new "strategic pillars" are as follows "deliver brilliant customer experiences, drive value and growth from the core and build growth in businesses close to the core".
Chief financial officer Warwick Bray tried to illustrate Telstra's cost cutting culture with the release of some internal data on productivity improvements.
He said that 90 per cent of broadband activations were now automated. This had meant a 280,000 reduction in activation calls. This had saved $6 million.
The introduction of straight through processing for business customers had result in $9 million in cost savings. The savings came from a 60 per cent reduction in the time taken for simple orders. The goal in 2017 is to cut the time taken for complex orders by 30 per cent.
Another $100 million had been saved through changing the retail organisational structure to remove duplication in channel support, product and central support functions. This resulted in a 20 per cent reduction in organisational layers.
Bray's final example was the $40 million saved through changes to the way Telstra conducts its tenders for construction work on its mobile network. This resulted in a 70 per cent cut in the time elapsed from issuing the construction brief to work happening on the operating site.
The big swing factor in any calculation of Telstra's net present value will be the assumptions made about revenue growth and margin expansion in its core businesses. It is possible the investments made in 5G and the shift by Telstra's businesses to digital operations will drive strong revenue growth and more than offset the loss of income from the NBN.
Until there is greater clarity about that the stock will continue to trade as a yield stock with a reliable fully franked dividend.
