Result and outlook largely as expected
Telstra Corporation's (TLS) 1H18 result and full year outlook were broadly in-line with our forecast. Excluding the Ooyala impairment, earnings per share (EPS) was 16.6 cents (which was 3% below our forecast and up 12.2% year-on-year). Including Ooyala reported EPS declined 3.4% year-on-year. TLS declared an 11 cents per share interim dividend which was in-line with our forecast and down 29% year-on-year. The dividend consists of a 7.5c ordinary dividend (paying out 71% of underlying EPS of 10.6c) and a 3.5c special dividend (paying out 58% of one-off EPS of 6.0c).
Guidance for FY18 EBITDA of approximately A$10.4bn and a 22 cent full year dividend is unchanged.
Three key points
There were three significant points of interest to us:
- Despite intense competition, mobile is doing well and delivering an increased subscriber count, albeit at lower price points. Mobile EBITDA was 4% higher than we had expected and down just 0.6% on 1H17. Considering Mobile EBITDA accounted for 48% of 1H18 EBITDA (ex NBN one-offs) and is a key competitive advantage, it's critical that TLS maintains its dominance in this segment. TLS added 0.5m mobile subscribers in 1H18 with pre-paid under pressure and the balance growing. TLS now has almost as many Machine-2-Machine as pre-paid subscribers (2.2m vs 2.3m).
- We are about a third of the way through NBN migration pains and TLS's cost-cutting measures are progressing well to help somewhat offset this. To-date EBITDA has reduced by A$870m (of the A$3bn expected hit from NBN) and costs have reduced by A$500m (of an expected A$1.5bn total cost out). Underlying core fixed costs were down 7.2% showing TLS can, and is, improving the cost base.
- Q&A on the conference call and industry commentary suggests to us that the investment market is starting to acknowledge the NBN has several serious challenges and its revenue target is looking less likely for a number of reasons. We maintain the view that the NBN will not ultimately charge $52 per subscriber per month and this means that TLS doesn't have as large a hole in EBITDA as many expected. Mathematically speaking if last mile prices reduce to the norm of A$15 this would see TLS's EBITDA hole being cA$2.0bn less than expected. Competition will absorb some of this but we have an optimistic view on the medium-term earnings outlook.
Our positive investment thesis is based on a pessimistic valuation, attractive fundamentals and the probability, in our view, that the NBN is forced to lower prices.
We retain our Add recommendation with a marginally increased share price target.
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