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

Amidst Challenges, Telstra Encountered Decent Growth: Telstra Corporation Limited (ASX: TLS) ended FY 2018 on the positive note as the company managed to report results which were in line with the guidance provided by it despite the challenging environment. The management stated that the company witnessed robust growth in the subscriber with regards to the mobile as well as fixed line. They also added that the company witnessed significant customer growth and favorable momentum was witnessed in the productivity program. Consolidate revenue came in at $26,011 Mn in FY18 (vs $26,013 Mn in FY17). As a result, EBITDA was down by 5.2% and amounted to $10,121 Mn as compared to the prior year. PAT came in at $3,563 Mn in FY18, showing degrowth of 8.4% on Y-o-Y basis. Moreover, the company saw the pressing need of the T22 strategy because of the pressures witnessed in the NPAT or Net Profit After Tax as well as on EBITDA or earnings before interest, tax, depreciation and amortization. This negative momentum was witnessed because of the further launch of the nbn as well as lower ARPU or average revenue per user. Despite the short-term headwinds, we presume that the company has potential to grow on the back of strong consumer portfolio, solid market and network presence, strategic initiatives such as Telstra 22 strategy, new product launches, and rise in demand of smartphone across the region. Henceforth, keeping the view of positive outlook in the business along with sectorial near-term headwind, we have valued the stock using the relative valuation method and 1-standard deviation to five-year average P/E of 14.22x for FY20E with EPS of $0.22 and have arrived at a target price upside of about single digit in near to mid-term. Key risks are the regulatory risk, stiff competition, technology changes, and short-term impact of nbn rollout, etc. Further, the recent news around TLS failing to provide NBN’s cheaper internet plans to retailers, is gaining some attention while this looks to pose some short-term headwinds.


Key Financial Metrics (Source: Company Reports, Thomson Reuters)

Recorded Strong Subscribers Growth in Both Fixed and Mobile – Sign of Stability in a Tough Environment: From the metric standpoints, Telstra added 88,000 retail fixed broadband customers, 342,000 retail mobile customers as well as 135,000 retail bundles in FY 2018. It signifies a sign of stability in a tough environment. The company stated that moving forward into FY 2019, the trading conditions are expected to remain challenging because of the pressure on ARPU as well as unfavourable impact of nbn network launch.


Income Growth by Product (Source: Company Reports)

Robust Net Adds Supported Mobile’s Performance: Telstra generated revenues amounting to $10.1 billion from its Mobile product which implies the YoY growth of 0.4% because of the robust momentum in the net adds which, in turn, aided favourable momentum in the wholesale, hardware as well as Machine to Machine. The mobile services generated revenues amounting to $7.80 billion reflecting the decline of 1.9% on the YoY basis. Amongst the mobile services, the negative momentum was witnessed in the Postpaid handheld ARPU because the robust momentum in the Minimum Monthly Commitment or MMC in the mass market got offset by the lesser out of bundle revenues as well as elevated competition. Moreover, the unfavourable momentum was also witnessed in the Prepaid handheld revenues on the back of fall in the unique users, migration to Belong as well as Wholesale and higher competition levels.   


Domestic Mobile Retail Customer Services Trend (Source: Company Reports)

Competition Levels, nbn Migration Impacted Fixed Product’s Revenues: Telstra garnered $5.81 billion in the form of revenues from its Fixed product which implies the decline of 9.2% on the YoY basis. This negative was witnessed because of the higher nbn migration rate as well as increased competition levels. However, these negative impacts got partly offset by the favourable retail bundle momentum in the H2 2018.


Domestic Fixed Retail Customer Services (Source: Company Reports)

Management Expects Challenges to Remain in FY 2019: The management of Telstra stated the FY 2018 saw significant competitive pressures. These pressures might also be witnessed in FY 2019. The management showed concerns related to the transition to the nbn network as well as higher levels of the competition in the mobile market of Australia. However, the management of the company stated that moving forward they would be conducting activities which could help in product simplification as well as removal of the pain points of the customers. They are also focused on the activities which aim to personalize the mobile as well as home packages for the Australian people. This process would be supported by digital tools, and this has the potential to even drive cost savings.

The management of Telstra stated that simplification of the charging model might eliminate up to $500 million in terms of revenues in the next three years. They added that these changes in the long term would be beneficial for the customers which would help in driving the long-term value. Moreover, the elimination of the above-mentioned amount from the revenues might get offset by the increased services per customer as well as decreased costs because of the simplicity. The company would be making deployments towards the high-quality content experiences.

Decent Dividend Pay-out to Continue Moving Forward: Telstra has a track record of consistent dividend payment with a dividend payout ratio in the range of 65% to 95%, fully franked over the past five years. In addition to the ordinary dividend, the company intends to return in the order of 75 per cent of future net one-off nbn receipts to shareholders over time through fully franked special dividends. Telstra’s dividend payout ratio for FY18 is 73.3% with dividend yield of 5.8%.

The company has been encountering challenges related to the NBN which is impacting its profits and therefore, dividends too. On the near to medium term basis, the company is expected to witness further challenges. However, in the long-term, the company is expected to witness decent growth because of the several tailwinds. Therefore, under regular circumstances and in the long-term, the company is expected to maintain a decent pay-out policy. 


Total Dividend Paid and Pay-outs (Source: Company Reports)

How T22 Strategy Would Improve Telstra’s Future Prospects: In June 2018, Telstra made an announcement of the T22 strategy which would help the company improving its position in the Australian market. This would be achieved with the help of simplification of operations as well as a product set, reduction of the cost base as well as improvement in the experience of the customers. The management of the company stated that they have made significant progress with respect to the strategy as they have rolled out fresh and new mobile plans without any excess data charges and also announced for new leadership team, organizational structure as well as operating model.

The company plans to achieve a strong position with the help of Telstra 2022 moving forward. This strategy would help the company in improving the customers’ experience as it plans to double the active 24/7 users of the application by FY 2022 and it also plans to increase the average services per customer moving forward. Also, the company expects that the strategy would help the company in terms of the cost productivity. The management of the company stated that the total costs would either be flat or witness a downward trend in the upcoming period from FY 2018. Additionally, the labour cost to sales ratio would also witness a fall.   


Historical P/E Band (Source: Company Reports)

Stock Recommendation and Outlook: In the last six months, the stock has risen 8.34% and is trading at decent PE multiple of 10.0x, indicating undervalued scenario at current juncture. A technical indicator, Relative Strength Index or RSI, has been applied on the daily chart of Telstra Corporation by using the default values. As per the observation, the 14-day RSI is moving towards the oversold region. After it reaches in the oversold area, a bullish momentum is expected to be witnessed. Therefore, it would not be wrong to say that the stock might witness upward momentum moving forward. Moreover, the fundamentals as well as recent initiatives are also supporting the long-term growth prospects of the company. Moving forward, Telstra’s networks, assets, balance sheet and people would support the company to deal with challenges. Not to forget, the digital tools might also act as the catalyst for the long-term growth prospects. Keeping the view of aforesaid growth catalysts and maintaining our positive outlook on the business along with sectorial near-term headwind, we have valued the stock using the Relative valuation method and 1-standard deviation to five-year average P/E of 14.22x for FY20E with EPS of $0.22 and have arrived at target price upside of about single digit (%) in near to medium term. We give a buy on TLS at $ 2.970.
 

TLS Daily Chart (Source: Thomson Reuters)

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