Telstra Corporation: Under the hood it’s looking good

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
18 February 2022, 9:00 AM
Sectors Covered:
Telecommunications, Technology

  • Telstra Corporation's (ASX:TLS) 1H22 result showed the second consecutive half of underlying growth, with underlying EBITDA up 5%, underlying EPS up substantially and the DPS flat YoY. Reported numbers dipped YoY due to lower NBN revenue and other one-off gains (which boosted 1H21 reported numbers). Mobile was the star performer.
  • Performance is tracking in the right direction and FY22 guidance was re-iterated.
  • We make minor EPS upgrades on lower D&A; retain Add and (login to view) target price.

Event - 1H22 result

TLS’s 1H22 result showed the second consecutive half of underlying growth, as expected. Underlying EBITDA was up ~5% to $3.5bn and underling EPS grew an impressive 55% to 6.2cps. Underlying EPS now exceeds underlying DPS.

Reported Revenue, EBITDA and EPS were all down YoY. Reported numbers were negatively impacted by a decline in the number of one-offs (which boosted 1H21 numbers) combined with a ~70% YoY decline in one-off NBN payments.

The Board declared an 8cps dividend (6c ordinary + 2c special).

The result was slightly better than our forecasts at the EPS line largely due to lower D&A.

A reiteration of FY22 guidance suggests all is going to plan.

Analysis - result inline to slightly better than our forecasts and trending well

As expected mobile, which accounted for 56% of 1H22 underlying EBITDA, was the star performer. Mobile services revenue was up ~6% YoY while mobile EBITDA was up an impressive 25% YoY on service revenue growth and cost savings.

Mobile margins expanded materially (900bps YoY). Some of this is temporary (e.g. less low margin handset sales due to supply chain challenges). However this result also shows the significant positive operating leverage on offer when subscribers and ARPU grow.

Mobile revenue growth is attributed to adding subscribers and increasing ARPU by ~5%. TMMC up $2 in 1H22. TLS’s 5G dominance is apparent in this result and should remain apparent for the next few years. Accounting changes mean ARPU is unlikely to grow in 2H22 (on a stat basis, but normalised ARPU will still grow).

The ordinary dividend increased from 5 to 6cps. Total dividends were flat YoY at 8cps. However, ordinary eps increased from 4.0 to 6.2c and now covers the ordinary dividend. The total div payout ratio is ~140% of EPS and ~60% of FCF.

Forecast and valuation update

With guidance reiterated, we have made no meaningful change to our FY22 EBITDA forecasts. We have, however, marginally increased our operating expenses in FY23 which decreases our EBITDA by 3%.

Offsetting this our EPS forecast lifts on lower depreciation and amortisation. Management guided for D&A to be broadly flat HoH. Given capex sits materially lower than D&A, and ignoring new large infrastructure projects, D&A should progressively decline. This lower D&A flows into FY22 and FY23, lifting our NPAT and EPS forecasts by ~5% and ~11% respectively.

We retain our Add recommendation and (login to view) target price.

Investment view

Add retained. Sector dynamics look positive and value realisation is possible.

Price catalysts

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

SOTP realisation (new business units track record, partial divestments, and full divestments of small holdings eg the potential IPO of Foxtel).

Risks

Key risks relate to industry pricing remaining rationale and realisation of value drivers.

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