Fitch Affirms Australia's Telstra at 'A'/Stable

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Fitch Ratings has affirmed Telstra's Long Term and senior unsecured debt ratings at 'A'. The outlook is stable.

Fitch said that Telstra's ratings reflect leading market share in the fixed-wire and wireless communication markets. It also reflects its superior coverage, the reliability and technology leadership of its wireless network, the coverage and capacity of its backhaul network, and its ownership of a material share of domestic mobile spectrum. A substantial rollout of its 4G network, covering 85% of Australia's population as at 31 December 2013, will continue to support its leadership in the mobile segment.

Telstra's strong free cash flows relative to competitors', enables it to sustain a competitive advantage and facilitate growth in mobile voice and broadband margins, while increasing mobile market share. The competitive nature of the Australian mobile telecommunications industry is unlikely to change in the near future, since its low population density and the lack of available spectrum deter potential new entrants.

The profitability of Telstra's individual segment margins continues to remain strong, benefitting from its multi-play offering of mobile, fixed voice, broadband, and pay-TV through its T-Box offering. Increased take-up of bundled services has improved margin in the fixed internet segment. Data-centric pricing and lower handset subsidies in the mobile segment have resulted in a resurgence of mobile margins.

Telstra is well-positioned to deal with the likely outcomes from the government's current review of the National Broadband Network (NBN) policy. In the event that the NBN agreements are terminated, Telstra will continue to have a contractual right to receive infrastructure rental payments for equipment leased to NBN Co., and could resume its fixed-wire incumbency in areas not covered by the NBN network.

Telstra has indicated that it intends to distribute surplus free cash flows that accumulate after setting aside funding for investment expenditure, future capital commitments and funding requirements to retain financial flexibility. Telstra announced a higher interim dividend per share of 14.5cents in 1H14 following a strong 1H14 performance, compared to 14cents at FYE13. We expect Telstra to remain prudent in its approach to distributing surplus free cash flow from the NBN transaction to shareholders in future.

As Telstra's fixed rate borrowings mature, Fitch expects Telstra to continue to benefit from the relatively lower variable base rates. Telstra's cash borrowing costs decreased by AUD117m reflecting a lower average interest costs of 6.1% in 1H14 (1H13: 6.4%). The reduction is attributed to the fall in variable base interest rates in Australia, reflecting lower costs on floating debt portion, and from re-financings at lower rates.

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