Lex Hall: Hi, I'm Lex Hall for Morningstar. And today, I'm joined by Morningstar's senior equity analyst, Brian Han, who's here to take us through Telstra's result. It's reported a 13p per cent drop in normalised net profit.

Brian, you've trimmed your fair value from $4.40 which you held for a couple of years. You've trimmed that to $3.80 now. What were your primary reasons for doing that?

Brian Han: Yeah. Thanks, Lex. The first thing I want to say though is that the actual result was actually quite good. So, it had nothing to do with the actual result. It met our expectations on the earnings and the dividend front despite a $200 million profit hit from the coronavirus. And it saw good growth in mobile customers and businesses such as network application services and global connectivity did much better than expected. The problem though was—the disappointment was in the outlook, Lex. And there were mainly three reasons. I think there will be another $400 million earnings hit from COVID in fiscal 2021 and it doesn't look like they will come back anytime soon after that. And that will be on top of $700 million of earnings headwind from the NBN.

Hall: We can't just assume that because of COVID people are stuck at home and they are using Telstra's services more, are they? That's not—they've got to maintain their network and that will cost them something, too. We can't just take that for granted, can we, that working from home is a tailwind?

Han: Exactly. I mean, working from home phenomenon will furnish them with certain amount of resilience compared to many other sectors which are suffering with virtually no demand. But that doesn't mean they will make more profit out of them because they are not getting more revenue out of people working from home because the prices that they charge are still the same. But there is a cost to servicing this higher demand. So, there is a yin and yang on all of that working-from-home phenomenon. So, I just want to caution people against having too much enthusiasm about what working from home means for Telstra.

Hall: OK. Let's get back to the guidance. They have a full year 2021 EBITDA of $6.5 billion to $7 billion. How does that compare to your expectations?

Han: Yeah, it was actually just over 10 per cent below what I was expecting. And again, going back to the reasons why I told you about the earnings hit from COVID and the NBN headwind. But we were also counting on management's cost out program to offset some of this earnings headwind. But it looks like Telstra is slowing down on cutting costs because it wants to be a good corporate citizen in these hard times which is understandable. And we were also counting on the mobile business to grow earnings to offset the headwinds. But now, it looks like competitive intensity in the mobile market is not letting up at all. So, those were the reasons, those were the three or four reasons why we had to cut our earnings forecast going forward by about 14 per cent on average and that in turn led to, as you say, the 14 per cent decrease in our fair value estimate.

Hall: OK. And we can't talk about Telstra without talking about dividends because it's been renowned as a dividend payer up until about 2017, I think, you say in your note. What's it paying this time around? And how does that…

Han: Yeah. So, the unfortunate direct consequence of my earnings forecast reduction is that we think dividends will also be cut going forward. So, we previously expected Telstra to continue paying 16 cents per share in dividend for the next few years, but now, we are expecting them to pay out 14 cents per share for fiscal '21 and fiscal '22 and that's all as a direct consequence of the forecast reduction that we put through. And the problem there is, as I said before, there are so many headwinds facing Telstra and we thought that productivity improvement, cost cuts and mobile growth will offset most of it. But what this result, what this outlook has shown me is that I think it will be quite challenging for those businesses to offset all these headwinds that are coming at Telstra.

Hall: OK. I just want to remind Morningstar Premium subscribers can read Brian's full note. Brian, thanks very much for your insights today.

Han: Thanks, Lex.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

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