Recap of FY18 result and the FY19 outlook
Telstra Corporation's (TLS) FY18 result was in-line with revised guidance. EBITDA was down 5% year on year to A$10.1bn and the dividend was down 29% to 22 cents per share. Operating cashflow and capex were up year on year and TLS paid down debt to end the year with net deb tof 1.6x EBITDA.
Looking to FY19 there were no material guidance changes and no comments on what the FY19 dividend may look like. Whether FY19 restructuring costs are, or are not, included in the underlying dividend could, in our view, swing the FY19 dividend by approximately 3 cents per share.
NBN Co is expected to release its revised business plan later this month and should they not downgrade their FY19 rollout targets as much as TLS assumes, then it's possible there is an upgrade coming, albeit one-off in nature.
The bad – underlying trends remain challenging as expected
NBN wiped about $1bn gross off fixed line EBITDA. Fixed revenue declined A$600m year on year with NBN margin pressure apparent. On a net basis, the EBITDA decline was approximately A$800m (after the approx. A$0.2bn year on year increase in NBN recurring payments).
Mobile revenue declined 2.9% or A$294m year on year while mobile EBITDA declined 6.3% or A$247m year on year.
Underlying core fixed costs were A$480m lower year on year. According to management TLS has taken out A$0.7bn of cumulative costs and remain on track to achieve their A$2.5bn target. That said, total operating expenses were higher in FY18 but should be flat in FY19.
The good – expanding its market share and economics will change
Network quality and content resulted in strong post-paid mobile adds. Post-paid and wholesale net adds in 2H18 were both near 5 year highs while pre-paid and mobile broadband net adds were near 5 year lows. Pre-paid competition remains intense. TLS is letting its whole challenger brands fight the value battle without damaging the Telstra premium brand.
Telstra dominated NBN net adds taking >50% market share. Its balance sheet will help the company ride out a competitive period to ultimately benefit when market dynamics change. Assuming the economics remain unsustainable, competitors will falter before Telstra does.
Telstra's 5G cell tower rollout is in full flight and will be quickly turned on once spectrum, standards and devices become available.
Our forecasts are largely unchanged, while our valuation and share price target increase slightly (Morgans clients can login to view). Upside risks relate to a share price re-rating once the market gains comfort with what sustainable EBITDA is. We think this is approximately A$8.5bn and this should value the core business at A$3.26 per share with upside risk from one-off gains on top of this.
Downside risks relate to management's ability to more clearly articulate TLS's sustainable EBITDA and deliver the cost out steps required to get there. We think competition should peak in FY19 but there is a risk that the competitive environment worsens.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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