Telstra Corporation: Good result, outlook overruled by the judge

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

14 February 2020, 11:40 AM

Sectors Covered:

Telecommunications, Technology

•  TLS reported an inline result, held DPS at 8cps and reiterated guidance.   
• Highlights were a return to underlying EBITDA growth for the first time since 2016 and a ~36% increase in free cash flow.  Products and business simplification continues to gain traction. TLS is now halfway through the T22 transformation and is progressing well. According to CEO, Andy Penn they have “brought the total underlying fixed cost reductions to around $1.6 billion since FY16.”   
• That said the result was overshadowed by the High Court of Australia approving the TPG Telecom and Vodafone merger. In the short term; this is a positive for TLS as we expect the company to be internally focused. However, in the long term it’s a negative, as there will now be a well-funded #3 full service provider. For the last decade or more Vodafone Australia has had limited capacity to invest. 

Result snapshot 

TLS’s result was largely in-line with our expectations however the new AASB16 accounting standards make comparisons difficult.

Revenue declined 2.8% yoy and underlying EBITDA (lease adjusted / ignoring AASB16) declined 6.6% yoy. Reported EBITDA increased 6.5% yoy largely due to AASB16 moving rental costs below the EBITDA line.

Reported NPAT declined 3% yoy while operating cash flow and free cash flow both grew materially yoy.

TLS declared a 8.0cps fully franked dividend flat year on year, and as with last year, consisting of a 5.0cps ordinary and a 3.0cps special dividend. 

Operating costs decline yoy on both a reported and underlying basis as TLS starts to receive the benefits of their T22 simplicity and transformation program.

Outlook 

At the mid-point, Guidance is for underlying EBITDA of $7.7bn; restructuring costs of ~$300m, Net NBN one-offs of A$1.5bn; and FCF of $3.6bn.

Ex NBN headwinds TLS expects to grow underlying EBTDA by ~$0.5bn in the year.

Mobile accounted for 49% of underlying EBITDA and the lead indicators continue to improve.

ARPU the trailing indicator and ARPU declines are expected to moderate in 2H20 before return to growth in FY21, with the assistance of 5G and the release of more 5G enabled devices in mid CY20.

We forecast mobile EBITDA to return to growth in FY21 (after ~3 years of declines). 

But TPM/Vodafone high court approval took center stage 

TLS’s result was overshadowed by the High Court of Australia overturning the ACCC’s decision to block, and instead approving, the merger of TPG and Vodafone. We view this as a short-term positive and medium-term negative for TLS.

This merger should result in more rational mobile pricing and an internal integration focus from TPM/Vodafone. 

Higher capex (Huawei 5G ban) means mobile prices will likely increase and NBN prices are already increasing (as 8/10 of fixed line households are now on the NBN).  

More information

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