Telstra Corporation: Pleased to be ringing in a new year

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
16 August 2019, 5:00 PM
Sectors Covered:
Telecommunications, Technology and Financial Services

  • TLS’s result was largely as expected, albeit at the upper end of guidance. Reported Earnings Per Share (EPS) and Dividend Per Share (DPS) were inline with our forecasts and down materially year-over-year.
  • We are now ~50% of the way through the negative impact of the National Broadband Network (NBN) (from a P&L perspective) and around 70% of TLS fixed line subscribers are on the NBN.
  • Reported EBITDA is likely to grow meaningfully from FY19 to FY20 but underlying EBITDA (excluding one-offs like NBN payments) it will be down ~8%. 

Result summary

On a reported basis it was a tough year:

  1. Revenue was down 4% yoy to A$27.8bn;
  2. EBITDA down 22% to A$8.0bn;
  3. NPAT was down 40% to A$2.1bn;
  4. EPS were down 40% to 18cps and the dividend declined 27% to 16cps.

The DPS consisted of a 10cent ordinary and 6cent special (equally split between 1H19 and 2H19). 

The good

TLS launched 5G and now has ~320 5G enabled base stations in 10 cities. Limited coverage is, as expected, a challenge which is being worked through and TLS is leading this race. TLS expect a 5x increase in 5G coverage in the next 12 months.

They noted 5G customers are on 5G about 25% of the time and are experiencing speeds that are twice as fast.

From an outlook perceptive management noted some signs of improvement.

They commented ‘Significant work over the past twelve months has seen strong progress on our T22 strategy. Notwithstanding the intense competitive environment and the challenging structural dynamics of our industry, underlying trends are expected to improve over the course of FY20’.

This is consistent with our view that things can, and in fact are, getting better from peak competition and pessimism in FY19. Our Morgans Telco shopper (retail price tracking) shows that consumer mobile and NBN prices both tracked higher from Jan 2019.

FY19 was also the end of an accelerated capex program (A$3bn system and backhaul upgrades for network simplification and 5G enablement). The good news is this spend dwindles from FY20 and management guidance is for a 10-26% increase in Free Cash Flow in FY20.

While we are not through the woods yet, much of the heavy lifting has occurred, and TLS is well placed for the years ahead. Intense competition has manifested itself in ARPU pressure which is likely to reverse in 2H19.

Through this period TLS has held ~50% market share in fixed and expanded its mobile market share in 2H19. 

The bad

FY19 was clearly a very challenging year and has set the benchmark low for FY20.

EPS, on a reported basis, was down 40% yoy and the DPS was down 27%.

Mobile EBITDA margins compressed 4% hoh to 32% while fixed margins compressed 11% hoh to 21%.

Investment view – Add

We have upgraded our EBITDA forecasts by ~6%. This reflects better cost control in conjunction with higher NBN one-off EBITDA gains.

Our forecasts previously sat below the NBN’s rollout target, and while still think they are a stretch target, we now sit at the lower end of TLS’s NBN one-off guidance.

Our valuation increases (Morgans clients can login to view detailed reports and price targets) and we retain our Add recommendation.  

More information

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

Disclaimer: Analyst owns shares in Telstra Corporation.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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