Telstra Corporation – Investor Day

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
21 June 2018, 10:15 AM
Sectors Covered:
Telecommunications, Technology and Financial Services

Investor day highlights

The investor day for Telstra Corporation (TLS) saw a number of significant announcements made regarding:

  1. FY19 guidance;
  2. simplification of TLS' product architecture;
  3. significant operational restructures (including changing reporting segments and including a new division (Infrastructure Co) from FY19);
  4. an additional A$1bn in cost out; and
  5. 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.

Investment view

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.

More information

Morgans clients can login to view our detailed report and revised share price target for Telstra Corporation (TLS). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer(s): Analyst owns shares.

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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