Telstra Corporation: The margin buyer is calling back
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 24 June 2019, 2:44 PM
- Sectors Covered:
- Telecommunications, Technology and Financial Services
After four years of underperformance, the tide has finally turned for Telstra Corporation (TLS). The company has moved from being on the receiving end of NBN and competitive pain to being given a helping hand with government intervention causing a stalemate on Huawei and the TPG/Vodaphone merger.
Three reasons to buy TLS
- There is valuation upside as we move to valuing the recurring earnings of InfraCo;
- the leading indicators for fixed and mobile (60% of recurring EBITDA) have turned positive (noting the P&L impact will take approximately 18 months to flow through); and
- the sentiment pendulum over-swung on the downside and will likely do so on the upside as well.
We are 70% through the NBN rollout and retail prices are going up
For over three years retail NBN prices have headed lower. In March 2015 the average 25/50 Mbps NBN plan price was A$107 per month. This dropped to a low of A$72 in December 2018 and has gradually headed towards $75 in June 2019. Our view is that since we are 70% through the rollout, the forced churn event has slowed and this leads to a lessening in price-based competition. The NBN expects to have 5.5m active households using it as a fixed-line service provider by 30 June 2019. We estimate there are 2.4m legacy household connections remaining in Australia. This equates to approximately 70% of the market (households paying the NBN for a fixed-line connection) and that the remaining 30% are on legacy networks like ADSL.
According to the NBN, it will complete the rollout in 2022 and at this point there will be 8.7m households paying to use the NBN. The NBN is expected to be made available to 11.9m households so it is forecasting a 73% take-up rate.
5G should drive revenue and subscriber growth in mobile
Mobile is still working through the tail end of homogenous 4G networks and price-based competition. The launch of 5G should reset competitive intensity and network quality will, for the first few years, outweigh price. TLS is leading the 5G drive and should expand its subscribers and ARPU (Huawei's 5G ban and Vodaphone/TPG merger delay help TLS).
We now value Telstra using a sum of the parts (EV/EBITDA) methodology. We have applied 11.5x EV/EBITDA to InfraCo and 6.4x to the rest of the business. This capitalises one-off NBN EBITDA but we broadly expect one-off EBITDA to be replaced in the medium term with cost out and revenue growth from 5G/Internet of Things. Assuming this happens then TLS's EBITDA and dividend should, at least according to us, be stable at approximately A$8bn and approximately 16 cents per share. Execution and investor sentiment remain the key risk/rewards.
We upgrade our share price target and retain our Add recommendation.
Morgans clients can login to view our detailed report and upgraded share price target for Telstra Corporation (TLS). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
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