Telstra Corporation Limited

Company Overview: Telstra Corporation Limited (ASX: TLS) is in the provisioning of telecommunications and information services, including mobiles, internet, and pay television. TLS operates through five segments with revenue share of Telstra Consumer and Small Business (TC&SB) (~54%), Telstra Enterprise (TE) (~30%), Networks and IT(N&IT) (~11%) and Telstra InfraCo (~5%) and all other (Includes Product and Technology Group, Global Business Services (GBS) and Telstra Health).

TLS Details

Revenue Stream and Cost Reduction Objective to Aid Future Growth: The company’s revenue stream is being supported by various products with the contribution of Mobile (40%), Fixed – C&SB (21%), Fixed – Enterprise (16%), Fixed – Wholesale (6%), Global (6%), Recurring nbn DA (4%) One-off nbn DA & connection (5%), and Others (2%). Since FY16, the company witnessed underlying fixed cost reductions of $2.3 billion. During FY21, the company’s total operating expenses improved by over 10%, and underlying fixed costs were down by $490 million and targeting a reduction of $430 million in FY22. In addition, the company is on track to achieve a cost reduction of $2.7 billion in the future period. For FY22, the company’s main priorities revolve around enhancing customer experience and compete for digitization, finishing restructuring of the group and generating value from InfraCo Fixed and InfraCo Towers and extending leadership in 5G.  

FY21 Operational and Financial Summary:  

• During FY21, the company witnessed strong customer growth in mobiles despite a sharp slowdown in the market due to COVID-19 pandemic. The company added 101,000 net retail postpaid mobile services, which include 67,000 branded and 34,000 from Belong.
• On a reported basis, total income for the year decreased by 11.6% to $23.1 billion. Underlying EBITDA on a guidance basis, which excludes one-off NBN income, and guidance adjustments fell by 9.7% to $6.7 billion. However, the underlying EBITDA for 2HFY21 was up over 1HFY21.
• Net Profit After Tax (NPAT) for the year increased by 3.4% to $1.9 billion on a reported basis. Free cash flow soared 11.6% to $3.8 billion.
• TLS paid a total dividend of 16 cents per share in FY21 and commenced an on-market share buy-back of $1.35 billion on 17- September 2021, which is likely to end on 30 June 2022. Together with dividend and share buy-back, total returns to shareholders in FY21 stood at $3.25 billion.

Revenue Share (Source: Analysis by Kalkine Group)

Nation Building Projects:  As announced on 2 February 2022, the company would make investments in two major telecommunications infrastructure projects to underpin the country’s digital economy and enable unprecedented levels of connectivity throughout Australia. The two projects include building and managing the ground infrastructure and fibre network in Australia for Viasat, a global communications company and a major new fibre project to build state-of-the-art inter-city dual fibre paths.

• Telstra is likely to make an investment of $1.4-$1.6 billion outside of its BAU capex envelope over the next five years to deliver both projects.
• In addition, the company anticipates investing up to 70% of this total commitment across its T25 planning period, or an additional ~$350 million of capex per year over FY23 to FY25.

What Investors Need to Know About T25 Strategy: In the month of September 2021, the company announced its T25 strategy in order to ramp up growth, enhance customer experiences via predictive analytics and localised support, and capitalise on permanent shifts in how people work and live. T25 has four strategic pillars:

• An exceptional customer experience you can count on.
• Leading network and technology solutions that deliver your future.
• Sustained growth and value for shareholders.
• The place you want to work.

T25 Strategy Benefits (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 7% of the total shareholding, while the top 4 constitute the maximum holding. Vanguard Investments Australia Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 2.12% and 0.96%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, TLS recorded a current ratio of 0.68x in FY21 as compared to the industry median of 0.56x. Cash cycle for the year improved to 51.8 days in FY21, from 61.7 days in FY20. On the leverage side, debt to equity ratio for the year stood at 1.20x as compared to 1.32x in FY20.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Uncertainties: The company’s operational and financial performance could be impacted by disruptions caused by the pandemic.
• Privacy and Cyber Security: TLS exposed to risk arising from the breach in cyber security, which may create disruption to its operations.
• Regulatory Risk: The company is exposed to a complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: Looking forward, the company would be focused on realizing value from its strategic investment in networks and continuing to grow core connectivity and services as well as existing and new growth businesses. For FY22, the company expects to report underlying EBITDA in the range of $7.0 billion -$7.3 billion, indicating a mid to high single-digit growth. By FY23, the company is targeting to attain underlying EBITDA of between $7.5 billion-$8 billion and a mid-single digit CAGR from FY21 to FY25. In addition, the company is likely to report total income in the ambit of $21.6 billion - $23.6 billion and free cash flow after lease payment of $3.5 billion and $3.9 billion. The company anticipates capex in the vicinity of $2.8 billion to $3.0 billion in FY22. The company is expecting to report an underlying ROIC of 8% by FY23 and to grow beyond this to FY25.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of TLS has been corrected by ~3.46% in the past one month, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ median, P/E multiple, considering the COVID-19 uncertainties and other material business risks, etc. For the purpose of valuation, few peers like Chorus Ltd (ASX: CNU), TPG Telecom Ltd (ASX: TPG), and Uniti Group Ltd (ASX: UWL) have been considered. Considering the expected upside in valuation, strong customer growth, rising bottom line, two nation-building projects, optimistic long-term outlook, diversified revenue stream, cost reductions initiatives, decent liquidity position, and current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of $4.030, down by ~0.494% as on 07 February 2022.

TLS Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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