Telstra as Australias Leading Telecommunications and Information Services Company - Essay Example

? Evaluate and report on the most recent (FY or FY if released) Annual Report of an Australian company Introduction The project report hasbeen written from the point of view of a sell-side analyst and has been directed at sophisticated investors. It includes the following: Business and Strategic Analysis: It includes analysis of a clear statement of the company’s activities, an analysis of the economy, the industry, and the company’s place in the industry, the company’s competitive and corporate strategy, and the implications of all of these for its future profitability. Accounting Analysis: It includes the analysis of the company’s three key accounting policies that are likely to affect interpretation of its financial reports, what the primary areas of accounting flexibility for these policies are, and a comparison to those of Times Telecom Inc. Financial Analysis: It includes the presentation and interpretation of relevant ratios for Telstra Corp. Ltd. and Times Telecom Inc., a time series analysis of these for both the companies over the past three years, an evaluation of the company’s cash flow position from operating activities, investing activities, cash flow to debt and equity holders, and cash flow to equity holders, and an analysis of the company’s overall financial position. Prospective analysis: It includes the forecasts of key elements of income statements and balance sheets for the company for the next five financial years, the presentation of these ‘condensed’ income statements and balance sheets, reasons for the major forecast items, valuation of the company using the methods: Discounted cash flow method and Gordon growth model, and an indication of estimated value per share. Recommendation: It includes recommending the client on the overall analysis of the company by summarizing all the analysis and by comparing the estimated value per share with the market value. Telstra is Australia’s leading telecommunications and information services company, offering a full range of communications services and competing in all telecommunications market. In Australia they provide 7.8 million fixed voice services, 2.8 million retail fixed broadband services, and 15.1 million mobile services. It’s international businesses include Telstra Global’s networks and managed services business, Hong Kong mobile operator CSL New World and Telstra’s China-based search and advertising businesses. 2. Business and Strategic Analysis The mission statement of the company is “We strive to serve our customers better than anyone else”. Economic Analysis: Australia is ranked 3rd out of the countries in the Asia–Pacific region. A policy framework that encourages impressive economic resilience has resulted because of Australia’s strong commitment to economic freedom. Openness to investment and global trade is resolutely institutionalized, and the economy has rebounded quite quickly from the global recession. Corruption is negligible, and a well-performing independent judiciary ensures strong fortification of property rights. Steady financial system and prudent regulations have allowed banks to withstand the global financial chaos with little commotion. Sovereign debt levels are under full control, and public finances are soundly managed. Australia becomes one of the world’s most trustworthy and lucrative environments for entrepreneurs because of A steady and transparent business environment. Industry Analysis: The telecom market of Australia is a extremely cutthroat market with a well-established independent regulator. The growth for mobile is expected to continue within postpaid and prepaid segments as all the leading mobile operators offer HDSPA and 3G services. Australia is a leading market in smart phone penetration in the world with local smart phone ownership predicted to grow to over 60% in the next 12 months along with an expected doubling in the volume of mobile data traffic. In particular, growth projections in the order of 280% to 2015 reflect the high demand for mobile broadband throughout the economy. Increasingly mobile telecommunications are at the centre of people’s lives, providing connectivity, productivity, and mobility benefits. Reflecting its growing impact and influence, mobile telecommunications is gravitating towards the centre of social and economic policy in Australia. The profile and pervasive role of mobile telecommunications in Australian society continues to attract attention from governments. Consumers using their smart phones for mobile broadband access, emails, videos, social networking, online banking and shopping highlight the convergent era, which is not only revolutionizing the way Australians go about their daily lives, but bringing about profound changes and challenges to market structures, business models and policy frameworks.  Vodafone, Telstra and Optus are the prime players of the telecom industry in Australia. The overall Australian telecoms market is still dominated by Telstra, even though it received just under a 60% market share of overall revenues in 2011, well down from the 80% market share it held in the early 2000s.  Company’s place in the industry: It is ranked 9 out of the top 2000 companies in Australia and is leading player in the industry. It enjoys a considerable market share of around 50% in the Australian Telecom Industry. Company’s competitive and corporate strategy: Telstra Corporation is one of the leading telecommunications company in Australia. It supplies a wide range of advertising, information services and telecommunication. Telstra backs its operation and strengths a competitive being against other players with its the stronger network infrastructures. However, Telstra Corporation could have an impact on their margins because of saturation in the mobile market of Australia. The core to the strategy of Telstra Corp. Ltd. is improving customer satisfaction. The aim of the company is to change the way customers talk about Telstra by building a culture of customer advocacy across Telstra. The market is full of variables, risk of investment increases, income is difficult to control, value chain becomes more complex, but also Telstra faces competition and the complaints of its monopoly from other rivals. Facing these challenges, Telstra has adopted the following strategic initiatives: From the original technology-driven shift to market-oriented, Telstra is based on the market in the management of corporation. Enhance consumer segmentation and consumer research. Telstra subdivided all the customers into seven major customer base and more than 100 micro-customer base, and take the budget market. Explore new revenue and expand the content of services. Provide widely media services such as fixed and mobile convergence services, broadband and mobile bundled services, movies, music, content services, etc. The company is to expand its business oversea, such as the purchase of SouFun Sensis for the corporation to develop ICT services. Reduce technology products and engineering investments; improve the investment of the products’ market launch, projects and infrastructure. Reduce costs and achieve the mode of “One Factory”. Such as reducing the number of networks and systems, taking budget management of products and prices to connect to the “One Factory” mode; reduce the NGN investment and labor costs. The operating expenses have increased thereby reducing the cash flow from operating activities in the cash flow statement due to the expansion plans. Mobile broadband is also on an increasing note as stated above and will increase to around 280% by 2015. 3. Accounting Analysis Analysis of key accounting policies: The accounting policies for Telstra Corp. Ltd. Are as follows: Construction Contracts – They record construction contracts in progress at cost less progress billings and any provision for foreseeable losses. Cost includes: Costs expected to be incurred under warranty provisions, penalty clauses and other variances. Amounts those are attributable to construction activity. Both fixed and variable costs directly related to specific contracts. Where there is an estimation of significant loss on completion, a provision for foreseeable losses is taken into account and recorded against the gross amount of work in progress. Profit and revenue is recognised on an individual project basis. The method used for recognition is percentage of completion method. It is calculated on the basis of estimated costs of completion. Profits are recognised when: Costs to complete and total contract revenues to be received can be reliably estimated. The costs can be clearly identified to date, and The stage of completion of contract can be reliably determined. The construction work in progress balance is recorded in current inventories after deducting progress billings. In case, progress billings exceed the balance of construction work in progress, the net amount is reflected in the balance sheet as a current liability under the head trade and other payables. The construction contract is significant as because in case the company estimates losses on completion of contracts then they create a provision before the completion and take it into account in the balance sheet. Depreciation on Property, Plant, and equipment: The depreciation is charged on a straight line basis to the income statement over their estimated service lives. Depreciation is not charged on freehold land. It is management judgement which plays a key role in determining the service lives of our assets (Telstra 80). Depreciation on assets is a key accounting policy as because different companies charge depreciation on their assets with different methods of depreciation. If depreciation method is changed the value of depreciation will come down. Supposedly the company follows written down value method then the depreciation amount charged would lower because of the change in written down value of the assets. The other competitor Vodafone for example charges depreciation on straight line method but the service lives decided by the management vary from that of Telstra. Due to different service lives the value of depreciation will also differ. Inventories: The company values inventories at the lower of cost and net realisable value. For majority of the inventories, they assign cost using the weighted average cost basis. For materials used in the production of directories the FIFO basis is used for assigning cost. Inventory valuation is also important as because the inventories are reflected in both the current assets and non-current assets but traditionally it comes under current assets. The competitor Vodafone values inventories at the lower of cost and net realisable value. They value cost on the basis of weighted average costs. Cost comprises direct materials, direct labour costs and those overheads that have been incurred in bringing the inventories to their present condition and location. Telstra values materials on the FIFO basis whereas Vodafone values direct materials on weighted average costs method (Vodafone 132). 4. Financial Analysis Presentation and Interpretation of Ratios Telstra Corp Ltd RATIOS ANALYSIS 2010 2011 2012 2013 A. Profitability Ratios         Gross Profit Margin= Gross Income/Sales 0.64 0.61 0.57 0.57 ROA= Net Income/Total Assets 0.10 0.09 0.09 0.10 Operating Profit Margin= Operating Income/Sales 0.27 0.24 0.24 0.26 Net Profit Margin= Net Income/Sales 0.16 0.13 0.13 0.15 B. Solvency Ratios         Total Debt to Assets Ratio= Total Debt/ Total Assets 0.46 0.44 0.44 0.48 Debt-Equity ratio= Total Debt/ Total Shareholder's equity 2.07 2.12 2.42 2.03 C. Liquidity Ratios         Quick ratio= Current assets - Inventory/ Current Liabilities-Bank overdraft 0.79 0.80 0.91 0.99 Current Ratio= Current Assets/Current Liabilities 0.83 0.83 0.93 1.05 D. Turnover Ratios         Return on capital employed= Net Income/ Capital Employed, where, Capital Employed=Debt Liabilities + Shareholder's Equity 0.13 0.11 0.12 0.12 Return on net worth/Return on Equity= Net Profit (after interest and tax)/ Shareholders fund 0.31 0.27 0.30 0.30 Times Telecom Inc. RATIOS ANALYSIS 2010 2011 2012 2013 A. Profitability Ratios         Gross Profit Margin= Gross Income/Sales 0.30 0.29 0.31 0.30 ROA= Net Income/Total Assets -0.07 -0.71 -0.33 -1.00 Operating Profit Margin= Operating Income/Sales -0.05 -0.12 -0.08 -0.24 Net Profit Margin= Net Income/Sales -0.03 -0.21 -0.09 -0.25 B. Solvency Ratios         Total Debt to Assets Ratio= Total Debt/ Total Assets 0.03 0.00 0.00 0.12 Debt-Equity ratio= Total Debt/ Total Shareholder's equity 2.75 -3.29 -2.41 -1.46 C. Liquidity Ratios         Quick ratio= Current assets - Inventory/ Current Liabilities-Bank overdraft 0.77 0.51 0.41 0.24 Current Ratio= Current Assets/Current Liabilities 0.81 0.59 0.53 0.27 D. Turnover Ratios         Return on capital employed= Net Income/ Capital Employed, where, Capital Employed=Debt Liabilities + Shareholder's Equity -0.07 -0.71 -0.33 -1.00 Return on net worth/Return on Equity= Net Profit (after interest and tax)/ Shareholders fund -0.25 1.67 0.46 0.46 The analyses of the ratios of Telstra Corp Ltd (TLS) and Times Telecom Inc. (TTT) over the years show that profitability ratios of the TLS are more compared to TTT (Thukaram 99). The solvency ratios of TLS have more or less remained in slight variation over time whereas for TTT, the same has decreased significantly (Siddiqui 642). A company with solvency ratio greater than 20% (0.02) is considered to be financially healthy and having less probability of being default of its debt obligations. Thus, TLS can be considered to be in a more stable condition than TTT. On analysis of the liquidity ratios, TLS can be considered to be under a more liquid state than TTT, thus TLS has higher probability to meet its current liabilities when compared to TTT (Weil 233). Due to net loss acquired from operations by TTT, the Activity ratios of the company are negative, whereas that of TSL is positive, as its profits have increased by 1.01% over the period of five years. Activity or turnover ratios help to determine how efficiently a company utilizes the assets and liabilities of the organization. These ratios are very useful when the performance of a particular company is compared to its competitors (Sinha 133). The efficiency ratios can calculate general use of machinery, turnover of receivables, sales or inventory turnover, fixed asset turnover and so on. The significance of efficiency ratio is in the fact that when the ratios improve over time it implies that the company’s profitability is also improving. From the ratio analysis of TLS and its competitor TTT it was revealed that the value of these ratios increased for TTT whereas the same decreased for TLS over time. This implies that TLS sales growth have moderated given overtime whereas for TTT the rate of slowdown was lower. Time Series Analysis over Past Three Years It helps to analyze the performance of company over a period of time using historical data. It can help the decision makers understand the pattern of growth or decline in any ratio and take necessary steps accordingly. It can also help in forecasting. Income Statement of Telstra Corp Ltd Time Series ITEMS 2011 2012 2013 Analysis   Currency in Millions of AUD % Change Revenues 25,093.00 25,368.00 25,678.00 1.2% TOTAL REVENUES 25,199.00 25,368.00 25,678.00 0.9% Cost Of Goods Sold 9,926.00 11,021.00 11,032.00 5.4% GROSS PROFIT 15,273.00 14,347.00 14,646.00 -2.1% Selling General & Admin Expenses, Total 895 910 927 1.8% Depreciation & Amortization, Total 4,459.00 4,412.00 4,238.00 -2.5% Other Operating Expenses 3,900.00 2,863.00 2,803.00 -15.2% OTHER OPERATING EXPENSES, TOTAL 9,254.00 8,185.00 7,968.00 -7.2% OPERATING INCOME 6,019.00 6,162.00 6,678.00 5.3% Interest Expense -1,082.00 -1,004.00 -921 -7.7% Interest And Investment Income 127 134 158 11.5% Other Non-Operating Expenses, Total -178 -23 -132 -13.9% Other Non-Operating Income (Expenses) -180 -18 -138 -12.4% Merger & Restructuring Charges -224 -162 -189 -8.1% Impairment Of Goodwill -121 -182 -3 -84.3% Gain (Loss) On Sale Of Investments -- -17 -- Gain (Loss) On Sale Of Assets 75 22 -61 Other Unusual Items, Total -59 4 -48 -9.8% EBT, INCLUDING UNUSUAL ITEMS 4,557.00 4,934.00 5,482.00 9.7% Income Tax Expense 1,307.00 1,510.00 1,617.00 11.2% Minority Interest In Earnings -19 -19 -52 65.4% Earnings From Continuing Operations 3,250.00 3,424.00 3,865.00 9.1% NET INCOME 3,231.00 3,405.00 3,813.00 8.6% NET INCOME TO COMMON INCLUDING EXTRA ITEMS 3,231.00 3,405.00 3,813.00 8.6% NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 3,231.00 3,405.00 3,813.00 8.6% Income Statement of Times Telecom Inc. Time Series   2011 2012 2013 Analysis   Currency in Millions of AUD % Change Revenues 18.8 21.5 13.5 -15.3% TOTAL REVENUES 18.8 21.5 13.5 -15.3% Cost Of Goods Sold 13.3 15 9.5 -15.5% GROSS PROFIT 5.5 6.6 4 -14.7% Selling General & Admin Expenses, Total 7.3 8 7 -2.1% Depreciation & Amortization, Total 0.4 0.3 0.2 -29.3% OTHER OPERATING EXPENSES, TOTAL 7.7 8.3 7.3 -2.6% OPERATING INCOME -2.2 -1.8 -3.3 22.5% Interest And Investment Income 0 0 0   NET INTEREST EXPENSE 0 0 0   Currency Exchange Gains (Loss) 0 0 0   Other Non-Operating Income (Expenses) -0.2 -0.1 -0.1 -29.3% EBT, EXCLUDING UNUSUAL ITEMS -2.4 -1.9 -3.4 19.0% Impairment Of Goodwill -1.5 -- --   Other Unusual Items, Total 0.2 -- --   Other Unusual Items 0.2 -- --   EBT, INCLUDING UNUSUAL ITEMS -3.7 -1.9 -3.4 -4.1% Income Tax Expense 0.3 -- 0 -100.0% Earnings From Continuing Operations -4 -1.9 -3.4 -7.8% NET INCOME -4 -1.9 -3.4 -7.8% NET INCOME TO COMMON INCLUDING EXTRA ITEMS -4 -1.9 -3.4 -7.8% NET INCOME TO COMMON EXCLUDING EXTRA ITEMS -4 -1.9 -3.4 -7.8% Evaluation of Company’s Cash Flow Position Cash Flow Statement of Telstra Corp Ltd ITEMS 2010 2011 2012 2013   Currency in Millions of AUD NET INCOME 3,883.00 3,231.00 3,405.00 3,813.00 DEPRECIATION & AMORTIZATION, TOTAL 3,638.00 3,640.00 3,516.00 3,222.00 (Gain) Loss From Sale Of Asset -12 -67 -4 61 (Gain) Loss On Sale Of Investment 9 -8 -- -- Asset Write-down & Restructuring Costs 209 210 211 52 (Income) Loss On Equity Investments -62 -71 -108 -154 Stock-Based Compensation 5 12 31 47 Other Operating Activities 1,268.00 1,421.00 1,135.00 1,185.00 CASH FROM OPERATIONS 9,691.00 8,018.00 9,276.00 8,359.00 Capital Expenditure -2,718.00 -2,342.00 -3,006.00 -2,818.00 Sale Of Property, Plant, And Equipment 24 16 17 57 Cash Acquisitions -95 -36 -- -9 Divestitures 12 302 -11 697 CASH FROM INVESTING -3,466.00 -2,541.00 -4,079.00 -3,335.00 Long-Term Debt Issued 1,777.00 2,340.00 3,049.00 2,126.00 TOTAL DEBT ISSUED 1,777.00 2,340.00 3,049.00 2,126.00 Long Term Debt Repaid -2,731.00 -2,597.00 -2,276.00 -4,139.00 TOTAL DEBT REPAID -2,731.00 -2,597.00 -2,276.00 -4,139.00 Issuance Of Common Stock 9 8 3 33 Common Dividends Paid -3,474.00 -3,475.00 -3,475.00 -3,480.00 TOTAL DIVIDEND PAID -3,474.00 -3,475.00 -3,475.00 -3,480.00 Other Financing Activities -1,062.00 -1,149.00 -1,207.00 -1,066.00 CASH FROM FINANCING -5,481.00 -4,873.00 -3,906.00 -6,526.00 Foreign Exchange Rate Adjustments -20 -72 17 36 NET CHANGE IN CASH 724 532 1,308.00 -1,466.00 Evaluation of Company’s Overall Financial Position From the cash flow statement of the company it is found that total cash from operations is positive and steady over the years. The requirement of working capital of the company can be fulfilled as cash generated from operating activities is higher than that from the investing and financing activities. The net income of the company has also increased by more than 10% from the previous financial year. Cash from investing activities is negative as because of the huge capital expenditure incurred by the company. Cash from financing activities is also negative as because the debt repayment of the company is huge. This is due to the higher usage of debt as we can conclude from the debt/equity ratio which is greater than 2. Total dividend paid also is the reason for negative cash flow from financing activities. 5. Prospective Analysis Forecasted Five Year Financial Statements Forecasted Five Year Income Statement of Telstra Corp Ltd ITEMS 2014 2015 2016 2017 2018   Currency in Millions of AUD Revenues 25,678 25,937 26,198 26,462 26,729 TOTAL REVENUES 25,678 25,937 26,198 26,462 26,729 Cost Of Goods Sold 11,032 11,143 11,255 11,369 11,484 GROSS PROFIT 14,646 14,794 14,943 15,093 15,245 Selling General & Admin Expenses, Total 927 936 946 955 965 Depreciation & Amortization, Total 4,238 4,281 4,324 4,367 4,411 Other Operating Expenses 2,803 2,831 2,860 2,889 2,918 OTHER OPERATING EXPENSES, TOTAL 7,968 8,048 8,129 8,211 8,294 OPERATING INCOME 6,678 6,745 6,813 6,882 6,951 Interest Expense (921) (930) (940) (949) (959) Interest And Investment Income 158 160 161 163 164 Other Non-Operating Expenses, Total (132) (133) (135) (136) (137) Other Non-Operating Income (Expenses) (138) (139) (141) (142) (144) Merger & Restructuring Charges (189) (191) (193) (195) (197) Impairment Of Goodwill (3) (3) (3) (3) (3) Gain (Loss) On Sale Of Investments -- -- -- -- -- Gain (Loss) On Sale Of Assets (61) (62) (62) (63) (63) Other Unusual Items, Total (48) (48) (49) (49) (50) EBT, INCLUDING UNUSUAL ITEMS 5,482 5,537 5,593 5,649 5,706 Income Tax Expense 1,617 1,633 1,650 1,666 1,683 Minority Interest In Earnings (52) (53) (53) (54) (54) Earnings From Continuing Operations 3,865 3,904 3,943 3,983 4,023 NET INCOME 3,813 3,851 3,890 3,929 3,969 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 3,813 3,851 3,890 3,929 3,969 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 3,813 3,851 3,890 3,929 3,969 Forecasted Five Year Balance Sheet of Telstra Corp Ltd ITEMS 2014 2015 2016 2017 2018 ASSETS Currency in Millions of AUD Cash And Equivalents 2,479 2,692 2,923 3,174 3,447 Short-Term Investments -- -- -- -- -- Trading Asset Securities 22 24 26 28 31 TOTAL CASH AND SHORT TERM INVESTMENTS 2,501 2,716 2,949 3,202 3,478 Accounts Receivable 4,494 4,880 5,299 5,754 6,249 Other Receivables 142 154 167 182 197 Notes Receivable -- -- -- -- -- Inventory 431 468 508 552 599 Prepaid Expenses 314 341 370 402 437 Other Current Assets 21 23 25 27 29 TOTAL CURRENT ASSETS 7,903 8,582 9,319 10,120 10,989 NET PROPERTY PLANT AND EQUIPMENT 20,326 22,072 23,968 26,027 28,263 Long-Term Investments 698 758 823 894 971 Goodwill 1,382 1,501 1,630 1,770 1,922 Other Intangibles 5,965 6,477 7,034 7,638 8,294 Other Long-Term Assets 473 514 558 606 658 TOTAL ASSETS 38,527 41,837 45,430 49,333 53,571             LIABILITIES & EQUITY           Accounts Payable 1,297 1,408 1,529 1,661 1,803 Accrued Expenses 2,931 3,183 3,456 3,753 4,075 Short-Term Borrowings 125 136 147 160 174 Current Portion Of Long-Term Debt/Capital Lease 626 680 738 802 870 Other Current Liabilities 975 1,059 1,150 1,248 1,356 TOTAL CURRENT LIABILITIES 7,522 8,168 8,870 9,632 10,459 Long-Term Debt 14,686 15,948 17,317 18,805 20,420 Capital Leases 214 232 252 274 298 Minority Interest 264 287 311 338 367 Other Liabilities, Total 3,230 3,507 3,809 4,136 4,491 TOTAL LIABILITIES 25,652 27,856 30,248 32,847 35,668 Common Stock 5,793 6,291 6,831 7,418 8,055 Retained Earnings 7,491 8,134 8,833 9,592 10,416 Comprehensive Income And Other (673) (731) (794) (862) (936) TOTAL COMMON EQUITY 12,611 13,694 14,871 16,148 17,535 TOTAL EQUITY 12,875 13,981 15,182 16,486 17,902 TOTAL LIABILITIES AND EQUITY 38,527 41,837 45,430 49,333 53,571 Key Assumptions ASSUMPTIONS % Change Revenues 1.01% Cost Of Goods Sold 7.20% GROSS PROFIT -2.83% Selling General & Admin Expenses, Total 0.47% Depreciation & Amortization, Total -0.84% Other Operating Expenses -10.53% Accounts Payable 15.58% Accrued Expenses 9.47% Cash And Equivalents 8.59% TOTAL CASH AND SHORT TERM INVESTMENTS 6.70% Accounts Receivable 4.74% Inventory 13.47% Long-Term Debt 5.53% TOTAL CURRENT ASSETS 3.23% NET PROPERTY PLANT AND EQUIPMENT -3.89% Long-Term Investments 12.59% TOTAL CURRENT LIABILITIES -4.67% Company Valuation (Using DCF Analysis) Details: Outstanding Shares (million) 12443 Current Price ($) 5.07 Beta (B) 0.5 historical market risk premium 7.50% Cost of Equity 17.75% Cost of Debt (Before tax) 6.95% After-Tax Cost of Debt 4.87% Tax 30% Growth Rate 5% Market Price of Equity (in Million AUD) 63086 Interest rate on 20 year Bonds (1926-2008) 3.29% T-Bill rate 2.30% equivalent average one-year interest rate 0.99% 1 2 3 4 5 Items/Year 2014 2015 2016 2017 2018 EBIT 3,813.00 3,851.43 3,890.25 3,929.45 3,969.06 Depreciation 4,238.00 4,280.71 4,323.86 4,367.43 4,411.45 Capital Expenditure (2,718.00) (2,342.00) (3,006.00) (2,818.00) (2,050.00) Increase in Working Capital 381.00 413.73 449.27 487.86 529.77 Free-Cash Flow (FCF) 9,244.10 8,904.99 9,603.76 9,448.19 8,710.02 NPV (FCF) 8,755.03 8,904.99 9,603.76 9,448.19 8,710.02 TPV (inc. Terminal Year CF) 45,487.33 Value of Company (in Million AUD) 45,487.33 WACC 5.59% Target Debt-to-Equity ratio 60.00% Terminal Year CF 65.34 Estimated Value per Share of Telstra (using DCF method) 3.66 (Pratt 214) Company Valuation (Using Gordon Growth Model) During the research it was found that company had consistently declared dividends during the past 10 years as follows: Date Dividends 8/19/2013 0.14 2/18/2013 0.14 8/20/2012 0.14 2/20/2012 0.14 8/22/2011 0.14 2/21/2011 0.14 8/23/2010 0.14 2/22/2010 0.14 8/24/2009 0.14 3/6/2009 0.14 8/25/2008 0.14 3/3/2008 0.14 8/20/2007 0.14 2/26/2007 0.14 8/21/2006 0.14 2/20/2006 0.14 9/26/2005 0.14 3/24/2005 0.14 9/20/2004 0.13 D1 (Dividend after 1 year) 0.10 P0 (Current Market Price of TLS) 5.07 Cost of Capital 7.04% Constant Dividend Growth Rate 5%     Estimated Value per Share of TLS (using Gordon Growth Model) 4.68 Hence, the Gordon’s Dividend Growth Model (Meyers 378) may be used to determine the estimated value per share of TLS.AX. Using the same technique it was found that the company’s estimated intrinsic value per share is AUD 4.68 (less than current market price AUD 5.07). 6. Recommendation The net cash flows of the company in 2013 have found to be negative which is not good for the company. The liquidity of the company is affected due to the cash position of the company. The gross profit margin of the company has found to be stable whereas the operating profit margin and the net profit margin have increased over the two years. The company does not have much liquidity in hand as reflected by the liquidity ratios. The company provides stable dividends on a half yearly basis which is good from the investors’ perspective. A company with solvency ratio greater than 20% (0.02) is considered to be financially healthy and having less probability of being default of its debt obligations. Thus, TLS can be considered to be in a more stable condition than TTT. From the ratio analysis of TLS and its competitor TTT it was revealed that the value of these ratios increased for TTT whereas the same decreased for TLS over time. This implies that TLS sales growth have moderated given overtime whereas for TTT the rate of slowdown was lower. The estimated value per share of Telstra using Discounted Cash Flow method comes out to be 3.66 whereas in case of Gordon Growth model it comes out to be 4.68. The current market price of the stock is around 5.16 which signify that the stock is overvalued. From the perspective of a sell-side analyst the stock should be sold as it is already overvalued. The stock is performing well in the markets as because it has been seen from the valuation that the stock is to be somewhere in the range of 3.66 to 4.68. 7. Work Cited Weil, R. (2012). Financial Accounting: An introduction to Concepts, Methods and Uses. United States: Cengage Learning. Pratt, S. (2009). Business Valuation Discounts and Premiums. United States of America: John Wiley & Sons, Inc. Meyers, R. (2010). Complex Systems in Finance and Econometrics. USA: Ramtech Ltd. Thukaram, R. (2007). Management Accounting. New Delhi: New Age International (P) Ltd. Siddiqui, S. (2006). Managerial Economics and Financial Analysis. New Delhi: New Age International (P) Ltd. Sinha, G. (2009). Financial Statement Analysis. New Delhi: PHI Learning Private Limited. Gibson, C. (2012). Financial Reporting and Analysis. United States: Cengage Learning. Sheeba, K. (2011). Financial Management. Navi Mumbai: Dorling Kindersley (India) Pvt. Ltd. Booker, J. (2006). Financial Planning Fundamentals. Canada: CCH Canadian Limited. Bloomberg. Telstra Corp. Ltd.: Balance Sheet. 2013. Web. October 30, 2013. . Yahoo Finance. Telstra Corp. Ltd.: Historical prices. 2013. Web. October 30, 2013. . Bloomberg. Telstra Corp. Ltd.: Snapshot. 2013. Web. October 30, 2013. . Bloomberg. Times Telecom Inc.: Balance Sheet. 2013. Web. October 30, 2013. . Bloomberg. Times Telecom Inc.: Snapshot. 2013. Web. October 30, 2013. . Telstra Corp. Ltd. Annual Report. 2013. Web. October 30, 2013 . Vodafone. Annual Report. 2013. Web. October 30, 2013. . Telstra Corp. Ltd. Share price. 2013. Web. October 30, 2013. . Read More