Telstra Corporation: The best breakup ever - we upgrade to an ADD

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
30 June 2021, 4:00 PM
Sectors Covered:
Telecommunications, Technology

  • Telstra Corporation (ASX:TLS) has surprised with the early divestment of a 49% stake in its InfraCo towers business. Bids were due by December 2021but an early starter with a good offer (28x EV/EBITDAaL for a minority stake) will consummate the deal in 1H22.
  • We view this as a good deal for TLS shareholders as: 1) TLS keeps control; 2) they get  a  high  price  (above  our  best-case  scenario  of  25x);  and  3)  it  shows management are serious about taking steps to continue releasing value.
  • We have consistently said TLS is worth ~$4.50 per share if the sum of the parts is able to be realised. With more confidence this can be realised we upgrade to an Add recommendation and set our Target price (login to view).

49% stake in InfraCo Towers sold for 28x EV/EBITDAaL

A consortium consisting of the Future Fund, Commonwealth Superannuation Corporation and Sunsuper which is managed by Morrison & Cohas offered TLS 28x EV/EBITDAaL(EBITDA after lease costs) for 49% of the asset.

TLS will receive $2.8bn of net cash at completion in 1H22. Prior tax losses are expected to shield TLS from deal related tax. Since TLS retains a controlling stake there is a minimal impact on its earnings. The InfraCo Tower financials are 100% booked through TLS’s P&L to the NPAT line. Then 49% of the NPAT (owned by the consortium) is extracted from that bottom line so that Profit attributable to equity holders of Telstra is slightly lower.

TLS will use roughly 50% of the proceeds (~$1.4bn) to pay down debt. The balance (~11cps) will be returned to shareholders. The healthy debt paydown means no material changes are expected from the debt ratings agencies.

CEO Andrew  Penn  said  “We  anticipate  providing  further  details  about  the manner in which we will return those proceeds, including a potential share buy-back in FY22, at our full-year results”.

TLS’s FY21result is due out on Thursday 12thAugust 2021. 

This deal looks good on a number of fronts

In our view this is great price for TLS to receive. Our best case was 25x or $5bn (43cpsfor 100%). US listed tower operates Crown Castle and America Towers are substantially more diversified and trade on 30x and 27x respectively.

We were also concerned that TLS wanting to retain control would discourage potential investors and therefore result in a lower price. This deal proves that not to be the case. It could also signal strong demand for other parts of TLS’s InfraCo portfolio which are some of the next steps for further value realisation.

InfraCo fixed would be a more complex deal due to its monopolistic assets (ducts) and a number of associated stakeholders including the government and NBN. However Division #4 (Telstra international) could also be a clean target for value realisation as, like InfraCo towers, it is not a monopolistic asset.

Forecast and valuation update

We update our forecasts to reflect this deal. FY22/23 EPS increases ~7%.

Investment view: upgrade to an Add recommendation

For some time we have highlighted our ~$4.50 sum of the parts valuation for TLS. Our concern was the probability of this value being realised.

Todays deal, which comes earlier and better-priced, gives us confidence that external investors are interested, despite TLS potentially retaining some control. 

The path to value realisation is looking clearer, albeit not 100% guaranteed. We now set our PT as a 50/50 blend of out SOTP and DCF. In the process we have rolled our DCF based valuation forward by twelve months.

Price catalysts

Result and details of shareholder returns on 12th August (FY21 result).

Further steps to extract the SOTP (scheme booklet due post results).

Continued signs of a return to more rational industry pricing. The last two months have been positive for mobile pricing and this should, hopefully, be maintained.

Risks

Completion of steps to realise/release Sum Of The Parts value.

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Disclaimer: 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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