Telstra Corporation: The tide has turned
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 13 August 2021, 7:30 AM
- Sectors Covered:
- Telecommunications, Technology
- Telstra’s FY21 result, FY22 guidance and confidence in the path to sustainable EBITDA of $7.5bn+ by FY23 were inline with our and consensus expectations.
- An on-market buyback of $1.35bn was announced, as expected, and is in our forecasts already.
- The key highlight was that mobile services revenue, mobile EBITDA and underlying EBITDA returned to growth (2H21 vs 1H21) and will continue to grow next year.
- Overall, this is the first time in years that TLS has delivered a good, clean result.
- Post forecast changes we upgrade our Target Price to (login to view) and retain our Add recommendation.
Event: FY21 result
DPS at 16cps was inline with guidance.
Underlying EBITDA of $6.7bn was down 9.6% yoy, inline with analyst forecasts and above the bottom end of managements guidance ($6.6-6.9bn).
The key highlight was that Underlying EBITDA grew from 1H21 to 2H21.
FY22 guidance for underlying EBITDA of $7.15bn (at the mid-point) is up 6.7% yoy and inline with analyst forecasts. The lower end of guidance still equates to growth.
Turn the page for more detailed segmental commentary.
Sustainability of earnings from FY23 and beyond (when NBN one-offs wain)
Commenting on FY23, management said, “With our ongoing discipline on cost reductions, continued strong performance in our mobile business, and a diminishing financial impact from the rollout of the NBN, we have confidence in our outlook and we believe we are on the path to achieving our financial ambitions of $7.5 to $8.5 billion of underlying EBITDA and ROIC of around 8 per cent by FY23”
The 8% ROIC is based on $7.5bn of EBITDA which is required to hold the dividend at 16cps. Management are comfortable at the lower end.
Forecast and valuation update
In FY22/23 we have upgraded our Underlying EBITDA forecasts by ~1% and lowered our reported EBITDA forecasts by a similar number (lower NBN one-offs).
In FY22/23 our reported EPS forecasts decline by 7% and 14% respectively on higher depreciation and amortisation forecasts. Management have now guided to depreciation and amortisation declining less than originally anticipated in FY22.
We have an Add recommendation on TLS.
Three key reasons for our Add rating are: 1) industry dynamics are improving (mobile prices are finally increasing); 2) the SOTP for TLS is worth more than the current share price (and steps to release this value are underway); and 3) Underlying EBITDA has returned to growth from 2H21 (and should continue growing over the next few year) which means earnings have found a base.
TLS will host a “strategy briefing” on 16th September 2021.
Further steps to extract value/ release the SOTP value – these include the legal restructure and the associated scheme booklet which is due post results.
TLS were aiming to get shareholders to vote on this ahead of their AGM 12th October 2021. However, this now looks likely to be later in the year.
Continued signs of a return to more rational industry pricing. The last few months have been positive for mobile pricing and this should, hopefully, be maintained.
Further slippage in completion of steps to release Sum Of The Parts value.
Potential for increased competitive intensity. After five tough years things are looking better but this improved outlook is not guaranteed to be sustained.
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