Telstra Corporation: Going out on a high

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

12 August 2022, 7:30 AM

Sectors Covered:

Telecommunications, Technology

• Delivering his last result, CEO Andrew Penn exits Telstra Corporation (ASX:TLS) on a high note. The FY22 result came in at the upper end of guidance (underlying EBITDA +8% YoY), FCF was a beat and TLS raised its dividend (+0.5 cents) for the first time in years.
• Dividend cuts commenced in 1H18 as the NBN and competitive pressures ramped up. It is no coincidence that the dividend has been raised post NBN / T22 completion and as the telco sector returns to more economically rational activity.
• Overall it was a good result, the FY23 outlook was inline and we retain our Add.

Event - FY22 result

Revenue was down ~5% YoY and 3% below our forecast. The decline was largely due to the near completion of the NBN rollout.

Excluding this, underlying revenue declined ~1% YoY and underlying EBITDA grew 8% YoY. Underlying EPS was up ~60% YoY while statutory EPS was down 8% and ~ 7% ahead of our forecast due to lower Depreciation, Amortisation and Net Interest Expenses. FCF was +4% YoY (on a guidance basis) and +8% YoY after interest and rent expenses. 

Key drivers of the EBITDA uplift were a ~5% YoY decline in expenses and mobile EBITDA growing 20% YoY. Mobile was 55% of underlying EBITDA in FY22 and as the largest contributor we expect it to grow again in FY23, unpinning guidance.

Strong FCF, a healthy balance sheet and good visibility for earnings growth in the future all resulted in the Board having sufficient confidence to raise the final dividend by half a cent to 8.5cps (3% ahead of Morgans Estimate and +3% YoY).

After years of scrambling hard to lower costs and offset declining earnings, TLS has comfortably turned the corner and guided to growth in underlying EBITDA again in FY23. Guidance is in line with consensus, 3% ahead or our forecast.

FY23 outlook commentary

In their 2020 and 2021 investor days management aspired to return TLS to growth and deliver Underlying EBITDA $7.5-8.5bn by FY23. Guidance says they will. 

Their FY23 “ambition” for $7.5-8.0bn underlying EBITDA excluded the recently acquired Digicel. FY23 guidance is in line with this (+9% YoY) after including Digicel. If we back Digicel EBITDA out, guidance is for $7.5-7.7bn (+5% YoY), which we still consider a good outcome considering aspirational targets were set years ago and well before inflation jumped. T22 has gone to plan.

After beating the upper end of FCF guidance in FY22, management has guided to FY23 FCF declining ~28% from FY22 to FY23.

This is due to a combination of higher capex (~$350m on national building/inter-capital infrastructure project announced in February 2022 and ~$150m due to the addition of Digicel capex), plus funding new mobile phone handsets for customers, and 5G investment. 

Current CFO Vicki Brady becomes CEO from 1 Sept 22. She was instrumental in delivering T22 and sounds unlikely to materially change TLS’s T25 growth plans. 

Finalisation of the legal restructure of TLS is expected before end-CY22. TLS awaits court approval and post this will provide scheme documentation to shareholders. Shareholders will vote on the legal restructure at TLS’s 2022 AGM on 11th October.

Forecast and valuation update

FY22 beat. FY23/24 Underlying EBITDA +4%/2%, EPS +7%/10% respectively.

Investment view

Telco has the strongest tailwinds in a decade with an increasingly rational market, pricing rises and the criticality of telco increasingly recognised. This combines with an incoming CEO who currently seems unlikely to drastically change the business and the potential for value uplift (potential bids) following the legal restructure.

We retain our Add recommendation and our Target Price lifts to (login to view).

Price catalysts

Proof points supporting industry rationality (ARPU rises sticking and FCF growing).

SOTP realisation (new business units track record, partial or full divestments).

Risks

Key risks relate to industry pricing remaining rational and realisation of steps to release Sum Of The Part value (infrastructure multiples are interest rate sensitive).

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