Telstra Corporation: Teeing off again after T22

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
17 September 2021, 8:00 AM
Sectors Covered:
Telecommunications, Technology

  • With T22 now upon us, Telstra’s investor day focused on aspirations for T25 (from FY23 to FY25), and they didn’t disappoint.
  • The crux of the investor day commentary is that the worst is now behind TLS. Earnings bottomed in FY20. Underlying earnings, and maybe even the dividend, are expected to grow at a reasonable pace over the next four years.
  • We retain our Add recommendation. Our Target Price increases (login to view) on higher medium-term earnings.

T25 = high teens double digit EPS growth from FY21 to FY25

Commenting on their plans, CEO Andy Penn, said “today’s announcement of T25 marks our transition from transformation to growth, from a strategy we had to do, to a strategy we want to do to focus on growth.

It is a strategy that builds on the strong foundations we have built over the last three years and remains focussed on what matters most – our customers, our people, our shareholders and on supporting the creation of a vibrant digital economy for Australia”.

The investor day includes some bold medium-term financial targets which were ahead of our medium-term forecasts.

Management’s aspirations are for mid-single digit underlying EBITDA and high-teens underlying EPS CAGR from FY21 to FY25. We think this suggests EPS of ~17cents by FY25. ~8% ROIC target for FY23 held and should grow beyond this.

Analysis

From a bottom-up perspective, the business has been transformed over the last few years. The outlook has turned from fighting an uphill battle against NBN and declining ARPU to rational pricing, price rises and a supportive backdrop.

A meaningful portion of this supportive backdrop is based on the assumption that industry pricing remains rational, and telcos are able to charge more for services that better value add. While we think this is the case, at least in the short term, it is not guaranteed. See our telco shopper charts overleaf for proof points.

TLS has changed its dividend policy (which the Board had ignored anyway). The ambition is to “maximise fully-franked dividend and seek to grow over time”. 

Forecast and valuation update

Key forecast changes are increases to our FY23/24 Depreciation and Amortisation. Management commentary is now that this is likely to be flat on FY22.

We have raised our medium-term EBITDA forecasts by ~5% which is the key reason for our valuation increases from (login to view).

Our FY25 EBITDA forecast sits below that implied by aspiration targets while our EPS forecast sits inline (more details are required to close the gap).

Telstra’s revised capital management framework

Maintain an A band credit rating. 

Maximise fully-franked dividend and seek to grow over time.

BAU capex of ~$3bn (excluding Spectrum and other management adjustments).

Invest for growth and return excess cash to shareholders.

Three reasons we have an Add rating on TLS

Industry dynamics have turned positive (NBN and mobile prices are increasing after 5 years of declines; TLS’s targets imply they continue to rise);

The SOTP for TLS is worth more than the current share price (and steps to release this value are underway; albeit timing is unclear); and

Underlying earnings returned to growth in 2H21 and should continue growing out to FY25 (underlying earnings have found a base and are headed higher).

Price catalysts

Another investor day on 16th November 2021; price rises; SOTP realisation.

Risks

Key risks relate to industry pricing remaining rationale.

Find out more

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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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