Telstra Group: Mobile won’t be silenced

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

17 February 2023, 7:00 AM

Sectors Covered:

Telecommunications, Technology

• Telstra’s (ASX:TLS) 1H23 result was broadly in line with expectations and full year guidance was reiterated, albeit with consumers buying less new mobile phone handsets.
• Mobile continues to deliver impressive results with key KPIs all pointing up.
• ADD retained, Target Price increased to (login to view).

Watch

1H23 result

TLS’s 1H23 was in line with our expectations. The one exception being the Board increased the dividend to 8.5cps which was in line with consensus but above us. 

Revenue grew 6% YoY and Underlying EBITDA grew 11% YoY. Optically Digicel helped. If we back Digicel out, importantly Underlying EBITDA still grew 6% YoY. 

Statutory EPS lifted 27% YoY to 7.5cps and the dividend lifted 6.3% YoY to 8.5cps.

FY23 guidance was reiterated, albeit with revenue at the lower end of the range. This is due to fewer consumers buying new mobile phones. It doesn’t impact profitably materially as it is low margin but does show consumers are starting to react to cost pressure /inflation and opting to hold onto mobile phones for longer. 

Doubling 1H23 underlying EBITDA gets most of the way to the bottom end of the guidance range. Given the business has positive earnings momentum, guidance looks comfortably achievable, in our view.

Forecasts and investment view

We lift our EBITDA forecasts 1-3% in FY23/24. Our FY23 EPS dips ~5% on higher interest and tax while our FY24 EPS lifts 3% with EBITDA flow through.

Telco has the strongest tailwinds in a decade with an increasingly rational market, price rises across the majors and the criticality of telco increasingly recognised. The last major mobile operator Vodafone/TPG increased mobile prices by ~$5 per month in January 2023 and all key players are behaving economically rational.

This combines with catalysts including the potential for InfraCo value release following the legal restructure. Add retained, Target Price increased to (login to view).

Noteworthy items

TLS delivered a 7.5% underlying ROIC in 1H23 (from 6.2% on 1H22) and is on-track for 8% in FY23. With a ROIC that now marginally exceeds WACC, TLS is back in the game of creating financial value. Mobile price rises across the sector should help competitors and continue pointing to industry rationality and sustainability.

1H23 underlying EBITDA has good momentum. Mobile is the largest part at ~57% of 1H23 Underlying EBITDA. Post-paid mobile subscribers lifted +2% YoY and APRU lifted +5% YoY. This resulted in a 10% increase in mobile revenue. Costs were controlled and EBITDA lifted 13% YoY. Mobile EBITDA margins expanded again, to 43%. TLS mobile plans allow for a likely annual CPI price rise in July.

Mobile growth was solid with subscribers and APRU on both pre and post-paid lifting YoY. Post-paid was in line with our expectations while prepaid a little softer. Price rises appear to have triggered some churn to lower priced alternatives but net-net were still a positive for the business.

InfraCo Fixed accounted for 21% of EBITDA. Revenue grew 6% YoY and margins broadly held. InfraCo towers (4% of EBITDA) delivered 10% YoY revenue and 5% YoY EBITDA growth. 

International (including the recently acquired Digicel/pacific mobile) is now 10% of EBITDA. It delivered double digit revenue and EBITDA growth. If we back out Digicel International, revenue grew 4% YoY and EBITDA 5% YoY. Digicel, like the TLS’s mobile business, experienced a rebound in earnings due to international travel resuming. It delivered $172m of EBITDA for the half. TLS noted a ~$100m mobile EBITDA uplift due to roaming / international travel returning.

Fixed segments continued to experience revenue and margin pressure.

One-off NBN disconnection payments dropped materially YoY and were less than 1% of EBITDA in the half. There were limited one-offs.

Management provided increased disclosure on InfraCo Fixed to help better realise the value. Many options for value release/realisation will be explored over the course of FY23. For now, there are no quantifiable actions. Stayed tuned.

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