Telstra Corporation: A clean result and a clearer outlook
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 11 February 2021, 11:00 AM
- Sectors Covered:
- Telecommunications, Technology
- Telstra Corporation's (ASX:TLS) 1H21 result was ahead of our forecasts and the full year outlook was broadly inline, albeit with higher FCF, due to tighter working capital. The dividend was held flat at 8cps ff which was ahead of our forecast for a 1c decline.
- The TLS Board, once again, looked past their own dividend policy to hold the dividend flat. Free cash flow comfortably exceeds the dividend and this shows Board confidence that the FY23 earnings targets should be met, and if met, TLS can sustainably hold its dividend at 16cps. Management have provided a much clearer view on the steps required to reach A$7.5bn+ of sustainable EBITDA. Underlying EBITDA should have bottomed in 1H21 and is set for growth in the years ahead.
- Releasing value in TLS’s InfraCo assets is again a priority with an update on the restructure due in March 21 and bids for InfraCo Tower due by the end of CY21.
- We retain our Hold but see this result as potentially the turning point.
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1H21 result snapshot
Revenue, gross profit, reported EBITDA and underlying EBITDA all declined 10-15% yoy, as expected. Divestments and a lower tax rate cushioned the blow and reported EPS declined 4.2% to 9.2cps.
Underlying and special EPS both declined ~33% yoy to 4.0c and 3.1c respectively. The Board looked through these declines and their own dividend policy to hold the dividend steady at 8cps in the half.
This consisted of a 5cps ordinary dividend and 3cps special dividend. Free Cash Flow per share was up an impressive 88% yoy to 13cps, representing healthy cash conversion and cycling a weak 1H20.
The FCF improvement represents lower cash required for handset/hardware (less new phones were purchased). Management tightened working capital. The balance sheet looks solid with Net Debt to underlying EBITDA at <2x.
FY21 guidance was broadly reiterated with lower revenue and higher FCF due better working capital. The Board declared they would pay an 8cps dividend in 1H21 and again in 2H21 suggesting a confident outlook.
Noteworthy items – underlying EBITDA returning to growth
Underlying EBITDA hit rock bottom in 1H21 and should return to growth in 2H21, after declining at an annualised rate of ~10% for many years.
CEO, Andrew Penn, said “After a decade of disruption following the creation of the NBN, and with its rollout now declared complete, we can clearly see the path to underlying growth ahead of us,” and “There is a lot of work ahead of us, but I remain confident we can achieve our financial ambitions including for underlying EBITDA of between A$7.5 and A$8.5bn and ROIC of around 8 per cent by FY23”.
The Board’s decision to hold the dividend flat shows they share this confidence.
Short term debt sits at A$2.8bn with A$3.3bn of long-term debt maturing in FY21 and 22 meaning TLS should be able to continue to bring down its cost of debt.
Steps are being taken to realise value in the InfraCo assets with an update due in March 21 and InfraCo tower bids due before they end of CY21. Mobile is set to return to growth in 2H21.
Investment view – Hold retained
Our Price Target increases from $3.21 (login to view revised price target) following minor forecast change.
We retain our Hold recommendation. 1H21 represents a cleaner set of numbers and a clearer outlook, which increases our confidence earnings and the share price, have bottomed.
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