About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
12 August 2016, 12:51 PM
Sectors Covered:
Telecommunications, Technology

Key points

  • Telstra Corporation's (TLS) FY16 result and 15.5c fully franked final dividend met expectations.
  • Guidance for "mid-single digit EBITDA growth" combined with a ~A$1.5bn share buy-back should see TLS deliver earnings and dividend growth in FY17.
  • TLS positively surprised with better customer adds than expected and in actual fact added more mobile customers in the current half (despite network challenges) than it did in 2H15 (pre challenges). In our view this proves a loyal customer base exists, prepared to see through the short-term network challenges TLS has experienced.

FY16 result snapshot and outlook

Telstra reported an impressive headline result with reported profit surging 36% to A$5.8bn. This did however include a ~A$2bn gain on the divestment of AutoHome and profits on a continuing basis were down 7% yoy to A$3.8bn. Operating cashflow and free cash flow grew strongly yoy and allowed TLS to increase the final dividend to 15.5cps fully franked. Mobile EBITDA was up 3.2% yoy. NAS and Global connectivity reported 112% and 88% yoy EBITDA growth, respectively. 

On the negative side, Fixed EBITDA declined 4.5% yoy and Data & IP EBITDA declined 5.5%.

Noteworthy items - balance sheet capacity and customer trends

After divesting AutoHome for a A$2bn profit and with National Broadband Network payments starting to accelerate. TLS's balance sheet was starting to look lazy so TLS has decided to put the funds to work in the form of larger capital investments and capital management. TLS announced it will undertake a A$1.2bn off-market share buy-back and a A$250m on-market share buy-back which will accelerate EPS growth due to a lower share count. 

Customer trends were better than many expected and despite some network challenges TLS still added 299k net mobile and broadband customers between 2H15 and 2H16 and 83k between 1H16 and 2H16. Mobile net adds versus the prior half were actually better in the 2H16 than in the 2H15. TLS, with the assistance of its value focused Belong brand, added 234k net broadband subscribers from FY15 to FY16. This is the fastest rate of net adds this category has seen in over five years.

Changes to forecasts

FY16 included the divestment of AutoHome so we have re-based our FY16 forecasts on updated numbers (for the continuing business). We have also incorporated TLS's guidance for capex at 18% of revenue (which is above their previous 15% range). The net result is our free cash flow forecast declines 3.4% in FY17. On a like-for-like basis we now forecast 4% normalised EPS growth for FY17, from 6% growth previously.

Investment view

We think Telstra remains an attractive dividend paying stock and see current capital management as protecting the downside for investors. We maintain our Hold recommendation.

More information

Morgans clients can login to access further analysis and our share price target for Telstra Corporation (TLS). If you are interested in becoming a client, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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