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Telstra Corporation Ltd (ASX:TLS) is betting it all on 5G

telstra shares
Credit: Telstra

Telstra Corporation Ltd (ASX: TLS) has just given the market the details in its investor day briefing.

There were a number of important details released within the presentation including a net reduction of 8,000 jobs, a further $1 billion to $2.5 billion of cost savings by FY22, profit guidance for FY19 and no commitment about maintaining the FY19 dividend.

For me, the biggest signal about Telstra’s future was its plan to package a lot of its business into an infrastructure company which will comprise its fixed network infrastructure including the data centres, non-mobiles related domestic fibre, copper, HFC, international subsea cables, exchanges, poles, ducts and pipes. Its services will be sold to Telstra, wholesale customers and nbn co.

Telstra ‘Infraco’ will also comprise Telstra’s nbn co commercial works activities and Telstra Wholesale with a workforce of around 3,000. This business will have a book value of $11 billion with annual revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) of about $5.5 billion and $3 billion respectively.

The new business unit will not include the mobile network assets of spectrum, radio access equipment, towers and some backhaul fibre. Telstra specifically said “this is particularly important for Telstra’s mobiles business as it executes its 5G strategy.

Telstra said that it will provide the opportunity for Telstra to demerge this business or allow the entry of a strategic investor once the nbn rollout concludes.

I think it’s quite easy to foresee that Telstra will sell some or all of its infrastructure company in the future, allowing it to solely focus on 5G. I believe this would be the right move because I’m sure over the long-term that most revenue-producing data will be transmitted wirelessly to products like automated cars and various items as part of the ‘Internet of Things’.

This would turn Telstra from a diversified telco business into a large bet on the 5G (and 6G?) future. Some investors may prefer this, as it is likely the best avenue for ultra-long-term sustained growth. However, Telstra would also be losing a lot of valuable cash-producing assets and segments of its business.

Foolish takeaway

I have said for some time that Telstra isn’t the best choice for people’s investment money. Whatever the investment is, it needs to have a path for long-term earnings growth and only after that box has been ticked should you consider if it’s a good dividend share or growth share for your portfolio.

There is going to intense competition from the likes of TPG Telecom Ltd (ASX: TPM) in the coming years. I’m not surprised to see that Telstra is currently down 5.3% today, I wouldn’t want to buy yet until I could see the economics of 5G make sense for the telco.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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