Telstra Corporation

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

03 May 2016, 10:46 AM

Sectors Covered:

Telecommunications, Technology

Key points

• Telstra Corporation's (TLS) investor day provided affirmation that while the recent mobile network issues have been bad publicity they have not resulted in net subscriber losses.
• TLS also announced a capital management program of at least A$1.5bn to commence in 1H17. The company reports its FY16 result on 11 August 2016 and has said it will provide further details at this point in time.

Despite what some think Telstra is still adding subscribers

No network is faultless and TLS's investor day clarified that despite several mobile network issues its customers remain loyal. TLS has continued adding customers (on a net basis) in the current half and has upped the stakes to ensure its mobile network and coverage remains the best in Australia.

Quantifying the NBN impact

TLS estimates group EBITDA will decline, on a net basis, by A$2-3bn pa when the NBN becomes fully rolled out in around six years. This equates to an 18-27% decline on current EBITDA of A$11bn and is the well flagged earnings hole TLS needs to replace. This will be a gradual process but don't forget that TLS's National Broadband Network agreement gives the Group an A$11bn post-tax Net Present Value (in 2010 dollars) to compensate for the loss of this income. TLS's task is to redeploy this capital organically, through acquisitions or buy-backs to grow its earnings and the dividend.

Capital management kicking off shortly

In mid-April TLS announced it had divested 47.7% of Autohome for ~A$2.1bn. Gearing sits below the bottom end of the Board's target gearing range. Consequently TLS has announced a capital management program of at least A$1.5bn. In October 2014 (when TLS had a higher franking balance than now) it completed a A$1bn off-market buyback. We have to wait until TLS's result for capital management details but expect the most obvious structure is an on-market buy-back which would allow TLS to lower its share by ~2% (at today's price) without having to dilute its franking balance.

Investment view

We await TLS's FY16 result (11th August 2016) for quantification of capital management initiatives. We think an on-market buy-back looks most likely but we have not yet included this in our forecasts. 

Upside risks relate to TLS subscriber adds coming in ahead of expectations and the possibility of an interest rate cut in Australia. Downside risks relate to share market rotation from defensives into growth stocks which, in our view, looks unlikely.

We maintain our Add recommendation.

More information

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