Telstra Corporation: Pedaling hard to catch the next cycle

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
29 November 2019, 3:37 PM
Sectors Covered:
Telecommunications, Technology and Financial Services

  • Commentary from TLS’s investor day, combined with catalysts expected in the next six months and our observations on the overall Telco market, increase our confidence that FY20 is ‘bottom of the cycle’.
  • Our observations on market share movements over the last six years combined with more recent price increases in fixed and mobile plans are charted overleaf.
  • These reaffirm our view that a cyclical improvement in underway and TLS is best positioned to benefit from improving industry economics and cost out.
  • We make no changes to our forecast, and maintain our Add recommendation (Morgans clients can login to view detailed reports & price targets).

Key takeaways

Our key takeaways from TLS’s investor day were:

  1. FY20 guidance is reaffirmed (pleasingly, conditions have not deteriorated further).
  2. Conditions have actually improved (from a leading indicator perspective).
  3. The key leading indicators for mobile and fixed (current plan prices or as TLS now call this Transacting Minimum Monthly Commitment/TMMC) have trended higher since June 19 (TLS branded postpaid mobile ARPU is up $2-$3 and TLS branded NBN ARPU is up $1).
  4. These leading indicators will take ~12-18 months to flow through, and hence postpaid handheld ARPU is expected to decline in 1H20 by a greater rate than 2H19, with the decline moderating in 2H20. NBN ARPU is also expected to decline in FY20. A greater percentage of lower ARPU Belong customers in NBN and mobile will also drag ARPU lower in FY20.
  5. Higher TMMC will drive mobile gross margin expansion over the next 12 months. Mobile is TLS’s largest EBITDA contributor (at ~30% of FY19 EBITDA). Higher TMMC and accelerating 5G subscribers (from mid-late CY20 when Apple’s 5G iPhone is likely launched) could mean TLS returns to mobile EBITDA growth in FY21, after several years of EBITDA decline.
  6. Product simplification is going well with consumer/SMB plans down from 1,800 to 20 and enterprise plans down from 650 to 488.
  7. TLS is running ahead of plans for their 5G mobile network expansion and their 5G network superiority (measured in speed) has been independently validated.
  8. Previously mentioned cost out targets remains on track.

Focus back onto InfraCo

InfraCo, as a standalone business unit, is just over 12 months old and progress is being made to mature its commercial relationship with Telstra retail (the rest of the TLS business). Reasons for TLS spending time on InfraCo are:

  1. It’s an important asset class and should be valued differently (we view every dollar of InfraCo earnings as being worth 80% more than every dollar of retail earnings).
  2. Improve operating efficiencies in the InfraCo business.
  3. Creating optionality for TLS InfraCo in a post NBN world. There are currently no plans to split the business but this could change over time.

Investment view – Add

We make no changes to our forecast, price target or Add recommendation (Morgans clients can login to view detailed reports & price targets).

Our view is that FY20 is the trough year.

The cycle is already improving and there are a number of potentially positive catalysts on the horizon with ~75% of fixed line households on the NBN by December 2019 and the TPG/Vodafone merger ruling due in February 2020.

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. 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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