Investor day highlights
The investor day for Telstra Corporation (TLS) saw a number of significant announcements made regarding:
- FY19 guidance;
- simplification of TLS' product architecture;
- significant operational restructures (including changing reporting segments and including a new division (Infrastructure Co) from FY19);
- an additional A$1bn in cost out; and
- plans to monetise A$2bn of assets.
We believe Telstra has used the investor day to reset the entire business, with TLS announcing that it will effectively split the business in two through the establishment of an Infrastructure arm for TLS' fixed line assets (with a potential demerger later). In the medium term these moves could reshape Telstra into a sustainable business (or two if they demerge "InfraCo"), however in the short term the restructuring costs and assumed NBN delays mean earnings decline materially.
FY19 impacted materially by restructuring and NBN delays
TLS has provided FY19 guidance comprising:
- revenue of A$26.6-28.5bn;
- EBITDA of A$8.7-9.4bn (excluding A$600m of restructuring one-off costs); and
- net one-off NBN DA receipts of A$1.8-1.9bn.
We understand that guidance assumes lower over-usage, restructuring costs and meaningful NBN delays. A large proportion of lower than expected EBITDA (versus our previous estimates) is TLS assuming prolonged NBN delays which means net one-off NBN receipts are A$1.25bn lower than we had anticipated. Given approximately 12bn shares on issue this equates to approximately 7.5 cents per share.
What happens to the dividend?
Management made no specific comments when questioned on the outlook for the FY19 dividend. We interpret the dividend policy as suggesting that lower earnings translate into a lower dividend (regardless of timing delays) and have therefore downgraded our FY19/20 DPS to 17 cents per share. We would highlight that the Board could alter the current policy to factor in a higher payout ratio of one-off NBN payments, or to include asset sale proceeds (A$2bn of asset sales realise approximately 17 cents per share for shareholders). However, given the uncertainty around this we do not factor this into our dividend assumptions.
Overall we believe today's changes will place Telstra (TLS) in a better position to improve the business in the medium term. Our positive investment thesis, which remains unchanged, is based on a low valuation and the probability, in our view, that the NBN is forced to lower last mile access prices (which would be a positive for the sector and TLS).
We believe the next 12 months are maximum competition/pessimism for TLS as NBN migrations peak (the highest subscriber churn year) and concurrently TPG Telecom launches its mobile network. In our view, FY19 may well be as bad as it gets for Telstra, but some positive catalysts are required to rebuild confidence and reinvigorate investor interest.
We retain our Add recommendation with a revised share price target.
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Disclaimer(s): Analyst owns shares.
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