“This ‘Cloud’ Has A Golden Lining (and a 9% dividend)” (Roger Conrad)

Sniffing out a teaser from Conrad's Australian Edge

By Travis Johnson, Stock Gumshoe, January 19, 2012

We looked at a few teaser picks from the Australian Edge service back when it launched last Fall, but this appears to be the first big push for new subscribers since then (don’t know the track record so far, but they say they’re “on track” for 106% gains this year).

I’ve gotten this teaser ad about a “cloud” company from many readers on both sides of the globe over the last few days …

… so let’s see if we can sniff out some answers for the finest readers in cyberspace.

To whet your appetite:

“An Australian communications company has just launched a ground-breaking new “cloud” service. Businesses, small to large, are now beginning to outsource all of their computing to this innovative service.

“This company is the latest stock pick in our award-winning portfolio, and they’re uniquely positioned to dominate Australia, the Pacific and the enormous markets of Asia.

“Savvy Australian investors–the few with enough knowledge to pay attention–are buying now, because life-changing gains are just around the corner.”

There’s a bit of rundown on just what “cloud computing” is — but you probably know all that already. Simply put, it’s putting all the data on servers so it can be accessed from anywhere, and relying less on the computing power or data in your office, or your cash register, or your iPad, or whatever.

And this “cloud computing” pick is an Australian firm, of course — here’s a bit more detail from the ad:

“An Australian communications company pays 9% every year. And they’ve maintained this rate for roughly a decade…

“So good or bad, through the best times and the worst, you can count on your payment. (It’s true: The land of the boomerang knows the value of a good return.)

“This stock is as predictable as a Disney movie. And now that you’ve heard the ‘happily ever after,’ let’s get to the gains-earning urgency that’s happening right now”

So what is the “cloud” that’s on offer here?

“They first began offering limited cloud services in 2009, and have slowly expanded since then. In July of 2011 they announced an AUD 800 million comprehensive upgrade. The new and improved cloud has just recently become fully operational….

“Large clients arrange contracts directly with this company, since they require custom service that can handle hundreds of employees.

“Smaller clients order services directly from the Australian Cloud website, and are able to set up either basic or pay-as-you-go plans that handle everything from customer databases to videoconferencing.”

And we’re told that this “cloud” service offering from this company is “sticky” — which makes the cash flow more predictable:

“Companies that choose the savings of the cloud are ‘locked in.’ Customer turnover rates are very low, as customers pay their subscriptions year after year after year.

“That’s why this is so safe.

“All of the frustration and risk of investing in a tech company goes away.”

What else makes this Australian cloud pick stand out? In Conrad’s words:

“It was the first Australian-based cloud service to receive SAP certification, making it the only Australian platform that can run Enterprise.

“But there’s one VERY BIG REASON that our stock pick has the most UNIQUE cloud in the world: As a communications company, they own the network that powers their cloud.

“This is an extremely important advantage.

“Because cloud services require an incredible amount of bandwidth to operate, clients of other services must first find a network provider that can offer bandwidth that’s robust, secure and reliable enough to handle cloud computing.

“But our pick makes it easy for their clients–because they already run one of the largest and most impressive broadband networks in the world.”

And apparently there was a big deal this year to expand broadband access:

“In October this company inked a deal with the Australian government to contribute their network to the National Broadband Network (NBN) for the price of AUD 11 billion. The goal of the NBN is to offer government-subsidized broadband access to every Australian, something that our stock pick isn’t able to do as a private company.

“This NBN deal is still awaiting approval from a regulatory board, and if it goes through, the ownership of the network will transfer to the NBN.

“But the home-court advantage doesn’t go away. The network will still run on the platform that was custom-built to run the Australian Cloud….

“… they get to pass off the maintenance costs, get paid AUD11 billion, and continue usage and maintenance of a network they built.”

And, we’re told, timing is key because…

“This giant infusion of cash from the sale will have an immediate effect on the share price.”

I don’t know about you, but I confess to having a certain fondness for “giant infusions of cash.” It just warms the belly somehow.

So who is this pick? A few more clues first, if you please:

They’re not just a “cloud” company — they’re a big telecom firm with a strong mobile business:

“They added 1.6 million new subscribers to their mobile service in the past year alone. They’ve greatly expanded the features of their mobile service, and that expansion is already earning them increased mobile revenues of AUD 8.1 billion.”

They’re offering mobile service in Hong Kong, and they’re active globally with businesses in New Zealand, the UK, India (where they’re contracting to build “fiber gateways”). Essentially, Conrad is arguing that the growing mobile and telecom business is a fine investment with a 9% yield, but that investors aren’t yet taking into account the “golden cloud” that will provide growth.

So … hoo dat?

Toss those into the mighty, mighty Thinkolator, spread a little Vegimite on top, and let it spin for a moment.

Should just be a sec now. There! This is … Telstra (TLS in Australia, TLSYY for the 1:5 ADR on the pink sheets or TTRAF for the 1:1 on the pink sheets — TLSYY has much better volume). And the yield is in the neighborhood of 9% — 8.5% currently if you go by trailing yield, 28 cents paid in 2011 and a current AU$3.30 share price, though the effective yield for US investors in the ADR is almost exactly 8% ($1.36 paid last year, current price $17.17). That might take into account the Australian withholding tax on dividends (I think it’s 15% like Canada’s, but that’s going from memory), or it might just mean the currency translation of dividends didn’t work in your favor last year. The pricing is pretty much exactly correct, in that the current trading price of the ADR is exactly five times the price of Telstra at the close in Australia (once you account for currency translation — the Aussie dollar is worth about US$1.04 right now).

Of course, dividends are generally higher in Australia, too — one of the things that US investors tend to like about the lucky country. That’s not just because of a tradition of high-yielding picks for individual investors, though they have that too, it’s also because there’s real competition for income investor attention, CDs and high-yield savings accounts in Australia have yields 5-6% right now. So for a telecom a nice 8.5% yield sounds pretty good even if you might question whether it’s sustainable, but compared to a risk-free 6% yield it doesn’t sound as nice. Verizon, on the other hand, yields about 5% but is competing with “safe” investments and high-yield savings accounts that are mostly well below 1.5%. Likewise, Telstra’s debt probably costs them more than comparable debt held by US telecoms, though they’re also a little bit less levered than most.

Telstra is one of the dominant Aussie telecom companies, not unlike an AT&T (T) here in the US or Rogers Communications (RCI) in Canada, they’ve got their finger in a lot of pies but for the most part depend on their wireline fixed assets for reliable cash flow (ie, the phone lines) and on wireless and services (like the cloud stuff) for potential growth. They have good margins, (a bit better than AT&T or Verizon, by way of example, and almost identical to Rogers) and they seem to carry a little bit less debt than the big US telecoms.

The deal to help create the national broadband network (NBN) in Australia is apparently controversial, I knew nothing about it before this morning and my reading of a few articles hasn’t changed that state terribly much — Telstra’s network of copper cable is indeed being sold, potentially, to the network for $11 billion. Telstra shareholders have approved the deal, but it sounds like there’s still plenty of work to be done before it’s finalized — variou agency approvals and some sort of transaction deal for Telstra to offload those fixed wireline assets to the NBN. At that point, Telstra will apparently become a service provider who doesn’t own those particular assets but still uses them, and their balance sheet would certainly start to look quite a bit shinier ($11 billion could theoretically wipe out almost all of their debt, though it would also mean, of course, that they’re losing a chunk of the value of their reported assets).

And they do also offer cloud services and similar hosted business telecom and computing services, including software-as-a-service programs. And some international businesses as teased, though those are not yet a major part of their operations. From a quick look at their full year results (their last fiscal year ended in June) it looks like the business is probably operating more or less as you’d guess, with mobile growing nicely and with fixed line telephony falling pretty quickly, and they also saw some declines in wholesale broadband thanks to pricing pressure, and a mix of results from other smaller segments. My brief overview indicates that they’ve been reinvesting in growth in services and their other initiatives, including Asian growth, but also facing some competitive pricing. And, like many big-fixed-asset businesses with excellent cash flow and pretty high non-cash charges (like depreciation), they pay out more than they earn — earnings came in around 26 cents for that year, and the dividend was 28 cents.

So will Telstra set your world afire with its cloud computing mastery? Well, maybe — I like the idea of the NBN deal, but it will be worth paying close attention to what they do with that cash, and I think it’s not beyond the realm of possibility that they’ll become more of a growth company if they invest the money well (and pay down some debt), but they also may lose some of the predictability of their fixed-line telephony cash flow — a declining business, to be sure, but still one that brought in more than $5 billion in revenue last year.

Excited about investing in Telstra? Think there are better options? Let us know with a comment below.

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34 Comments on "“This ‘Cloud’ Has A Golden Lining (and a 9% dividend)” (Roger Conrad)"

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Eric Waite
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Eric Waite
January 19, 2012 12:51 pm

Travis, who is the largest manufacturer of Nitrogen for fertilizers? And, if I could have two wishes, who are the two Canadian banks that pay 4-5% on deposits?

Thanks for all of your fabulous work. It really is a helping hand for us “little guys”

Eric

George
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George
January 19, 2012 1:13 pm

Given his record, I suspect that your morning of investigation is more than Roger Conrad did before publishing the teaser. I still quite clearly recall his complete ignorance of the Halloween Surprise in Canada (wacking royalties), even though there was quite obviously insider trading occurring in the days leading up to the official announcement. His claims on having the inside track on anything were fairly much debunked at that point.

Jim
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Jim
January 19, 2012 1:46 pm

lol at vegemite Travis

Ray
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Ray
January 19, 2012 2:01 pm

I appreciate your research and comments. They have been helpful to me over the years and I hope you will continue with them. I especially like your research into these teasers since I got hooked on a couple a few years ago and never have recovered the investments.

crapsmaster
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crapsmaster
January 19, 2012 4:38 pm

I like Australia co’s. but check out WIN for a long term investment, solid co. and not afraid to buy out the smaller competition.. Hey, Travis can you look into “Pat Cox” w/ Agora, on their Yukon Gold find, small cap with huge upside (of course). Discovered by Pat Ryan.? Thanks, your simply MARVELLLOUSSS…….

Dave Barr
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Dave Barr
January 19, 2012 5:00 pm

as always Travis, nothing but good work. I think $200 is way too cheap to become an irregular. Every day when I fire up my old computer. off to the mail to see if you,ve posted any
any thing, then on to the rest….of the computer stuff.
Dave Barr

Jess
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Jess
January 19, 2012 4:43 pm

Travis, Would you give me some insight as to the sashortreport2.com . This is by Jeff Clark of San Francisco. Any and all info would be appreciated.

theaccusersgift
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theaccusersgift
January 19, 2012 4:56 pm

One thing I don’t like about Roger Conrad is that his copywriters used “average return” instead of “compound return” when computing his results over a long period of time (e.g. 10 years).
As a result, ho-hum 6-8% annual returns became like 35-47% annual returns.
So I completely ignored his advertisements for newsletters after that.

Jeffery Jackson
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Jeffery Jackson
January 19, 2012 5:44 pm

Any one out know the name of the California MLP paying 10.2% from Roger’s Big Yield Hunter.

Joan in Houston
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Joan in Houston
January 19, 2012 7:11 pm

The average annual return regarding any investment is next to worthless.

KLBECK
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KLBECK
January 19, 2012 7:49 pm

Australia withholding is 30% – AT&T looks good at that rate…

Deborah G Flynn
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September 9, 2012 11:21 am

I have to invest for myself so Travis you are a Godsend. I can’t affor5d the time or money to sort throuh 20 publications daily. I am a happy irregular. That being said I always hesitate when I see these teasers. I’d rather invest in At&T but recently have done excedingly well woith the out of favor Frontier with tight trailing stops and my favorite pick these days is Century Link. It’s been a nice choice. Look at it and se if it fits your plan. regards Deb

Tom t
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Tom t
January 19, 2012 9:10 pm

i TRIED the Canadian Edge 2 1/4 years ago, and built a watch list of Roger’s picks (including YellowPages Tr)- the portfolio did extremely well and still boasts 8 >100% wins, w/2 >200% +yields!. Most of the rest did well also and YP was one of 2 duds.
Of course the market was bullish a good bit of that time, The letter was much cheaper then as well. I prefer non-dollar investments so Canadian companies seem safer.

Tom t
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Tom t
January 19, 2012 9:18 pm

You mention $ 10B is not even equal to TLS’s debts, so you have the single best reason to love this deal- going from hdwe. to sfwe.. It will take this ongoing capital intensive hdwe. monkey off their backs, without compromising their game plan. Sounds like a really good strategy, and they have the courage to embrace this shift.

Fabian
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Fabian
January 19, 2012 11:41 pm

Withholding tax is 15% as per article 10 of the convention signed between use and australia.

Patricia Gustin
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Patricia Gustin
January 20, 2012 8:45 am

Thanks, Travis. I am a fan of Roger Conrad’s, and 9% dividends. So, I bought some TTRAF yesterday at $3.45/share. I might sell after the deal, hopefully goes through as I would question their ability to sustain their dividend. We’ll see.

Patricia Gustin
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Patricia Gustin
January 20, 2012 4:50 pm

To anyone that may be interested, the 9%, or $0.28 dividend is guaranteed for this year, per the minutes of the annual shareholders meeting. And, I doubt I will sell. Lots of attention placed on technology. Now I am very excited about the cloud play. They have a significant footprint in Hong Kong.

Neil M Campbell
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Neil M Campbell
January 21, 2012 9:14 am

Roger did well on CanRoys – oil/gas! Anyone that blindly bought Y.P. deserves what they got!
Do Your DUE DILLIGENCE on any investment or a “fool and their money soon part”!

CoolSoupy

miltonmoney
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miltonmoney
January 21, 2012 8:55 pm

thanks for entering aussie stocks more in gumshoe..yum yum vegimite.sambos…

james
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james
January 22, 2012 12:20 pm

If you get ripped off or burned in an investment check out http://WWW.CLIENTSRFIRST.COM

canonfodder
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canonfodder
January 22, 2012 1:11 pm
New Subject; I guess that I have proof that the market is stupid at times. I hold a stock that has increased 41% since the beginning of August, 2011. Yes, just 6 months more or less. But that increase includes a drop during last week from a close of $8.88 last Wednesday to a close on last Friday at $8.20. This is a drop of 7.66% ! There has been absolutely no news to cause a drop. The increase is well merited, as the company is having simply great results in certified testing of a totally new way to fight… Read more »
Gabe Fabe (London)
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Gabe Fabe (London)
January 28, 2012 9:32 am

Edward Maddox,

The stock you mention sounds interesting, for both reasons you give – care to share its name?

Thanks

loy oakes
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January 23, 2012 12:00 pm

Tlsyy sounds good since they have the money to back out and pay off debt. Another Aussie stock I like and own is Tag oil ‘TAOIF’ huge lease holdings and ramping up production.

Jacqueline Brown
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January 23, 2012 7:52 pm

Edward, could you please give us the name of your cancer-fighting research firm for those of us interested not only in making profits but also devoted to helping to eradicate the terrible scourage of Cancer? Thank you.

Bill Cotter
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Bill Cotter
January 23, 2012 9:06 pm

Hi Jacqueline, I put Edward’s stock in the ‘thinkolator’ and came up with Micromet, Inc. (MITI)

Jacqueline Brown
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January 25, 2012 10:21 pm
Thank you Bill – I appreciate so much. Now, I’m wondering if anyone has a handle on the Pepsi or Coke teaser being run by “energy-expert” Dr. Moore – which is he promoting, Coke or Pepsi? I’m thinking of buying PepsiCo but would like to know which he favors and the reasoning behind it. I have done a little investigating on my own and while they’re both great long-term investments in my mind, PepsiCo seems the better one if only slightly. Hope Travis can put in the old Thinkolator and come up with an answer or perhaps one of you… Read more »
Bill Cotter
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Bill Cotter
January 26, 2012 3:20 pm

Hi Jacqueline, It doesn’t make sense that Dr. Kent Moors would be teasing for Coke or Pepsi. He is an energy ‘expert’. I could not find anything on his website.
http://www.kentmoors.com/
Travis has a review of one of his teasers dated March 28, 2011.
http://stockgumshoe.com/reviews/energy-advantage/the-new-energy-boom-thats-predicted-to-be-15566-bigger-than-oil-and-it-could-quadruple-your-money-in-the-next-8-to-12-months%E2%80%A6-dr-kent-moors/

Lloyd Moss
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Lloyd Moss
January 29, 2012 7:19 am
I subscribe to several publications that Roger Conrad publishes: Canadian Edge, Utility Forecaster and Big Yield Hunting. I am very pleased with the first two. Big Yield Hunting has picks with a much higher risk profile that I am interested in. As far as Australian investments, I have dabbled in a couple on my own but have been investing for growth, not income. I usually invest in income only in my tax deferred accounts (except MLP’s). What I don’t know is whether Australia will waive withholding if you have a tax deferred account. This is the case for Canada. Anybody… Read more »
Joe Underwood
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Joe Underwood
February 6, 2012 7:28 am

The 11 billion will be given over a period of time, not all at once. It is designed to make up for the loss of revenue of the land line phone business. the govt. is ready to get started on it. This is all according to news releases.

faye menczer
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faye menczer
February 11, 2012 12:56 pm

I am new to Gum Shoe. It is a great revealer. I am new to non-U.S. investments and considering starting with ETFs of Australia,Canada,Japan, and Singapore. I am looking for safety. Any comments?

Anthony Smith
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April 5, 2012 1:38 pm
The Telstra deal is an interesting one…..not quite as cut an died as one would expect. The reason is that the government (a minority government relying on a group of independents to keep them in power) is pushing this deal big time. However, the opposition, which in reality IS the government in waiting, regards the cost of the NBN (National Broadband Network) as a huge drain on government funds and the economy as a whole as well as being conceivably quite a outdated technology by the time its up and running and has said they would scrap the deal !… Read more »
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