“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.

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“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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Jacqueline Brown
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 knows. Thanks for any help.

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Bill Cotter
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.
Travis has a review of one of his teasers dated March 28, 2011.

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Lloyd Moss
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 know that answer?

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Joe Underwood
Joe Underwood
February 6, 2012 7:28 am