Company Overview: Telstra Corporation Limited (Telstra) is a telecommunications and technology company. Its principal activity is to provide telecommunications and information services for domestic and international customers. The Company operates through four segments. The Telstra Retail segment provides telecommunication products, services and solutions across mobiles, fixed and mobile broadband, telephony and Pay television/Internet Protocol television and digital content. The Global Enterprise and Services segment provides sales and contract management for business and government customers. The Telstra Operations segment offers overall planning, design, engineering and architecture and construction of Telstra networks, technology and information technology solution. The Telstra Wholesale segment provides a range of telecommunication products and services delivered over Telstra networks and associated support systems to other carriers, carriage service providers and Internet service providers.


TLS Details

Australia’s key telecommunication services provider is growing its base of mobile subscribers and has seen a strong uplift in network application services. NBN has been said to have a major impact on Telstra, as around $3 billion of expected EBITDA is highlighted to be taken away from the telco by 2020. Despite of this environment full of challenges, the Company announced a solid result for the first half that was in line with the guidance. The group has been performing well in terms of cost management and financial metrics.

Solid results in line with the guidance for the first half of 2018: Telstra released its half year results for financial year 2018 and reflected an increase in the number of subscribers on mobile. Further, there was a reduction in underlying core fixed costs and progress was made under its strategic investment program. On a reported basis, including the Ooyala impairment, the total income was up by 5.9 per cent and EBITDA was down by 2.5 per cent. Including the impairment, NPAT was down by 5.8 per cent and EPS was down by 3.4 per cent. On a guidance basis, total income was up by 5.4 per cent and EBITDA was up by 3.4 per cent. The Board resolved to pay a totally fully franked interim dividend of 11 cents per share that comprised of an interim ordinary dividend of 7.5 cents per share and an interim special dividend of 3.5 cents per share, consistent with Telstra’s revised dividend policy and FY 18 guidance. Until the end of December Telstra had invested approximately $1.4 billion of additional capex and included $1.3 billion on networks and $100 million on digitisation.


Half Year 2018 Financial Performance (Source: Company Reports)
 
Outlook for 2018: The Group reconfirmed FY18 guidance and this was consistent with December 2017 announcement. In FY18, TLS expects income to be in the range of $27.6-$29.5 billion and EBITDA to be in the range of $10.1-$10.6 billion. $1.4-$1.9 billion of EBITDA is expected to come from net one-off nbn Definite Agreement receipts less nbn net cost to connect. Capital Expenditure is expected to be between $4.4-$4.8 billion. The Group has also reaffirmed that it expects its FY 18 total dividend to be 22 cents per share and this will be fully franked including ordinary and special in accordance with its dividend policy.
 

Comparative Analysis (Source: Company Reports)
 
Continued to improve the customer experience: Telstra added 454,000 nbn connections maintaining a 51 per cent of market share excluding satellite. Fixed voice and fixed data EBITDA margins declined to 38 and 17 per cent, respectively, and were impacted negatively by upfront costs of connecting customers to the nbn network and rising network payments to nbn co. The impact of the nbn along with the increased competition, highlighted the importance of the up to $3 billion of strategic investment program and the group is on the track to deliver economic benefits from this of more than $500 million of EBITDA by FY21. The Group switched on its Cat M1 Internet of Things (IoT) capability that has the largest IoT coverage in the country and launched Narrowband IoT capability which is now available over its mobile network in major Australian cities and in many regional towns.

Deriving value and growth from the core:  The group added 235,000 of the retail mobile services and included 130,000 post-paid handheld services with 21,000 as Belong mobile and 118,000 as wholesale mobile services. It has now increased its customer basis in mobiles for 20 consecutive halves despite of the intense competitive pressures. It has recently increased its capacity further to deliver 80 per cent of the maximum speed during the peak times that is ahead of ACCC guidelines. On affordability, nbn announced the discounts on its 50/20 plans which is a step in the right direction as it flows through to retail offers. The group upgraded the nbn speeds and is in the process of bestowing 50/20 speeds to the majority of its nbn customers. It added a 12-month subscription to Foxtel Now on $99 and above Go Mobile Plus plans and a three-month subscription on its $99 broadband bundle.


Product Performance (Source: Company Reports)

Network Expansion and Foundational Investment: The group also launched artificial intelligence based virtual assistant ‘Codi’ and an “Online Order Status Tracker” for nbn customers. There was a 13 per cent reduction in call volumes and a 24 per cent increase in number of active 24*7 application users. Telstra Programmable Network expanded, and more than 150 customers signed up in 1H18. The Group shifted to cloud-based core systems and transferred all CRM to Salesforce platform systems and delivered better outcomes for customers; and this enabled it to shut down its legacy systems. The Group has invested ~$1.3 bn till date and activated more than 400 small cells and planned a further 850 of it. It launched 5G Innovation centre on the Gold coast that enabled the Company to take the first 5G data call on 26Ghz spectrum. It upgraded the core backbone of the infrastructure to enable a support of 5x capacity and improve resilience.  Its Next generation optical transport network has been deployed between five capital cities.

Direct Carrier Billing Dispute: With regards to Telstra ceasing Direct Carrier Billing services to its DCB providers, Impelus attempted to try and resolve the issue of Direct Carrier Billing Dispute but was not successful. Impelus strong position is that TLS has a continuing obligation to provide it with the Services after March 2, 2018 and intended on initiating proceedings in the Supreme Court of New South Wales to seek injunctive or expediated final relief to prevent Telstra from ceasing to provide it with the Services from March 2, 2018. Its premature withdrawal of the services in March 2018 in breach by Telstra will have a material impact on Impelus’ FY 18 revenue and EBITDA. The Company estimated that the impact on EBITDA for FY18 will be in the range of $550k to $680k. The directors remain committed to a resolution on this issue but are of the view that the commencement of the proceedings in the Supreme Court will be in the best interest of all the shareholders at this time to preserve the Company’s rights that have been breached by Telstra. On the other hand, Telstra intends to defend itself in any proceedings in relation to the above.
 

Strategic Investments (Source: Company Reports)
 
Stock Performance: As it is estimated that the rollout of the nbn will have a material impact of $3 billion, the group has till date cumulatively absorbed approximately $870 million of the negative impact to EBITDA and out of this, $370 million was attributed to the latest reporting period. Telstra’s Operations business also grew strongly, albeit from a lower base. The stock prices have dipped 20.79% in last six months (as at February 16, 2018) and this paves an interesting investment opportunity. TLS seems to be building well on its fundamentals despite the softness seen last year and the recent dispute with Impelus. We give a “Buy” recommendation on the stock at the current price of $3.44
 

TLS Daily Chart (Source: Thomson Reuters)

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