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Post Market Wrap | Telstra legal restructure on track for completion in October 2022

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Legal restructure formalises separate ownership of infrastructure assets in new entities
  • Restructure creates optionality to monetise embedded value in privileged infrastructure assets
  • Strong global demand exists for mobile tower assets at compelling valuations 
  • Telstra International to be established, with a focus on subsea cables
  • Global demand for high quality telecommunication infrastructure assets supports long term shareholder value accretion. 

Telstra legal restructure  

Telstra is on track to finalise its legal restructure over the course of 2022, which will see the establishment of a new parent entity, to be known as Telstra Group Limited. Telstra shareholders will receive one new Telstra Group Limited share for each of their existing Telstra Corporation Limited shares. The legal restructure will result in the transfer of assets and liabilities between various entities within the Group. The transfers will be effected by a Scheme of Arrangement, which requires Court approval before the changes can be implemented.   

The restructure is much more than a variation to Telstra’s name; it is a fundamental change that responds to a rapidly evolving telecommunications industry driven by digitisation, analytics, Artificial Intelligence, and related technology network ‘smarts’, as well as unlocking the inherent value embedded in Telstra’s privileged assets. These key essential assets include the towers, ducts, fibre, data centres, subsea cables and exchanges that support Australia’s leading telecommunications network. The restructure is a complex process and the most significant corporate change since privatisation. 

A key outcome for shareholders is that the restructure should enable a higher overall market value to be attributed to the Group by improving visibility and returns on essential fixed assets with monopolistic style characteristics and value. This is because Telstra’s infrastructure assets have identifiable, contracted, long term, recurrent and low-risk cash flows. These assets, on a standalone basis, autonomously managed by a separate leadership group, should release value to shareholders over time. While not explicitly stated by Telstra’s management, the legal and structural separation of key monopolistic style assets provides optionality for the sale or separate ASX listing of these assets. Given their reliable cash flow and low risk profiles, compared to other service-oriented parts of the business, a standalone entity comprising these assets is likely to command a premium valuation by global investors. 

Four Standalone Business Units 

Once implemented, Telstra’s legal structure will comprise four main operating entities:

  • InfraCo Fixed
  • InfraCo Towers
  • ServeCo
  • Telstra International.  

InfraCo Fixed will own and operate Telstra’s physical infrastructure assets. These assets include ducts, fibre, data centres, and exchanges. 

InfraCo Towers will own and operate Telstra’s mobile tower assets. It is these assets that have the market keenly interested, given the strong demand and compelling valuations for this type of high-quality infrastructure. 

ServeCo will maintain Telstra’ focus on products and services, including the radio access network and spectrum assets that are mission critical to the Group’s mobile coverage and network superiority.   

Telstra International will be established as a separate subsidiary within the Group, with a focus on subsea cables. 

Intercompany Agreements have been created between the infrastructure owners (InfraCo Fixed and InfraCo Towers) and ServeCo  that support sustainable earnings for each of these entities and preserve shareholder value at the Group level.

Image: File

Looking Ahead 

The legal restructure terms, once approved by the Court, will be put to a shareholder vote to ratify the Scheme of Arrangement. The Scheme Booklet outlining the restructure terms is expected to be available to shareholders in September 2022. Depending on the date of the shareholder meeting to vote on the restructure, the exchange of new shares in Telstra Group Limited is expected to occur by the end of October 2022.

For now, investor focus is less about the state of the business today and more about how well positioned Telstra is for the future. The digital economy is the future and its dependence on a reliable, technologically superior telecommunications platform is fundamental to the vibrancy and productivity of the Australian economy.  

The legal and physical restructure of Telstra is right for the times and with the increasing value of infrastructure assets globally, the soon to be re-named Telstra Group Limited, is well placed to deliver shareholder value accretion over the long term.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

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U.S. small business confidence hits 3-1/2-year peak

US small business confidence hits 3.5-year high post-election, driven by optimism for economy and hiring plans.

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U.S. small-business confidence reached its highest point in nearly 3-1/2 years in November, according to the National Federation of Independent Business (NFIB).

The NFIB’s Small Business Optimism Index increased by 8.0 points to 101.7, marking the highest level since June 2021.

This surge followed the recent elections, which saw Donald Trump winning the presidential race and the Republican Party gaining control of Congress.

Small business owners, who typically lean Republican, showed increased confidence, a trend anticipated by economists.

Other sentiment surveys also reported improvements in consumer confidence post-election.

Economic improvement

The percentage of small business owners expecting economic improvement rose significantly, indicating a shift in outlook.

More owners believe now is a good time to expand their business, with expectations for higher sales growth increasing. Concerns about inflation slightly lessened, as fewer owners cited it as their primary issue.

Additionally, the uncertainty index for small businesses dropped, reflecting increased stability in economic expectations.

Despite ongoing labor shortages in various sectors, the number of businesses planning to hire rose to the highest level in a year.

Compensation for employees saw an uptick; 32% of owners reported increases, while a notable percentage plans further raises in the coming months.

 

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Money

Inflation report tests stock rally before Fed meeting

**Inflation report next week could impact stock rally; Fed rate cuts anticipated amid strong job growth and resilient economy.**

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An upcoming inflation report will assess the strength of the U.S. stock market rally and influence the Federal Reserve’s rate cut strategy.

The S&P 500 has recorded its third consecutive weekly gain, increasing over 27% year-to-date.

This upward momentum in equities is influenced by expectations of additional Fed interest rate cuts amid a resilient economy.

Friday’s employment report indicated stronger than expected job growth, reinforcing this positive outlook. However, this data is not expected to change the Fed’s rate plans for its upcoming December meeting.

The consumer price index data due on Wednesday may alter this optimistic sentiment if inflation exceeds expectations, posing risks for well-performing stocks.

Experts note that if inflation rates are high, it could create uncertainty for investors before the Fed meeting.

Following the recent jobs report, the probability of the Fed cutting rates has increased, with nearly a 90% chance predicted for a 25 basis point cut.

The consumer price index is expected to rise by 2.7% over the past year.

If CPI results are higher than expected, it might prompt a cautious approach on future cuts, affecting outlooks for 2025.

Additionally, inflation concerns are heightened by the potential introduction of tariffs by President-elect Donald Trump.

Despite these factors, stock prices continue to rise, although there are warning signs of overly optimistic sentiment in the market.

Some analysts maintain a positive view on stocks heading into the year-end, citing a reduction in concerns surrounding the economy and interest rates.

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Money

Stocks on the way to achieve three consecutive years of gains

S&P 500’s strong 2024 raises hopes, but concerns linger over AI sustainability and economic headwinds affecting future gains.

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The S&P 500 has risen 28% in 2024, poised for consecutive annual gains of over 20%.

Major banks forecast more modest returns for 2025, projecting the index reaching 6500, a 6.7% rise from approximately 6090.

Barclays has a more optimistic target of 6600, with Bank of America and Deutsche Bank expecting 6666 and 7000, respectively.

President-elect Donald Trump’s policies are seen as potentially beneficial for stocks, though high interest rates and geopolitical issues pose risks.

Investors remain cautious about the sustainability of the rally.

Economic conditions

Upcoming inflation data will be crucial for assessing economic conditions before the Federal Reserve’s anticipated rate cut in December.

Increasingly, small-cap stocks are joining the rally, with the Russell 2000 index nearing record highs.

More than 220 S&P stocks have hit 52-week highs recently, which indicates broader market strength, making it less susceptible to downturns.

The early market gains were largely driven by major tech stocks, which continue to perform well amid various challenges.

Long-term growth expectations, however, appear dim, with forecasts suggesting limited gains over the next decade.

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