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
 
Entering a significant phase in the transformation as the nbn rollout is reaching scale: For FY17, Telstra Corporation Ltd (ASX: TLS) reported 4.3% yoy (year on year) growth in total revenue from continuing operations at $28.2 billion while posting 2% increase in EBITDA at $10.7 billion. Net Profit After Tax (NPAT) from continuing operations increased 1.1% to $3.9 billion. However, together from continuing and discontinuing operations, NPAT decreased 33.8% to $3.9 billion (due to $1.8 billion from the sale of Autohome shares included in FY16 NPAT). During the year, the company witnessed continued growth across key segments, with retail mobile net adds of 218,000, including 169,000 post-paid handheld net adds, and 132,000 domestic retail fixed broadband customers. On the other hand, nbn connections grew by 676,000 to 1,176,000 bringing total market share to 52% (ex-satellite); and retail bundles continued to perform well, with 224,000 adds on the back of the popular ‘Best Bundle Ever’ and ‘Hottest Entertainment Bundle’. Currently, the company is entering a significant point in the transformation of the telecommunications market as the nbn rollout is reaching scale.

During the year, the company announced its intention to invest up to $3 billion over the next three years to achieve a further step change in strategic positioning to deliver economic benefits of more than $500 million of EBITDA by 2021. This is in addition to its usual capital spend and takes expected total capital investment including spectrum over the three years to FY2019 to more than $15 billion. Telstra announced a fully franked final dividend of 15.5 cents per share in H2FY17, bringing the total dividend for the financial year to 31.0 cents per share. The company returned $5.2 billion to shareholders in FY17, including the $1.5 billion on and off market share buy-backs during the year. Recently, the group appointed Vicki Brady as Group Executive for its Consumer & Small Business.


Group results – Income Statement; (Source: Company reports)

Significant traction with retail customers for the Netgear Nighthawk M1 mobile device: Both strategic and episode Net Promoter Score (NPS) witnessed strong recovery in H2FY17 by improving 6 points and 2 points, respectively. Moreover, the company is seeing significant traction with retail customers for the Netgear Nighthawk M1 mobile device, which remains one of the fastest devices in the world. TLS’ mobile hotspot device, Telstra Nighthawk M1, has been created in partnership with Qualcomm, Netgear and Ericsson. Notable feature of the product is, it can deliver an incredible one gigabit per second download speed. Additionally, it has also launched a market leading Frontier modem, providing an integrated fixed and mobile capability for home fixed broadband customers. Notably, in media, Telstra TV has reached almost one million customers with very high NPS and strong activation and usage rates. Additionally, it will launch the Telstra TV2, providing customers the unique experience of air TV, catch up TV and streaming services. Similarly, its sports apps now have 1.45 million users, providing a significant value component to its mobile plans. Further, it has launched Pixel smartphone through an exclusive partnership with Google in Australia. Notably, the acquisitions of Kloud and Readify have reinforced TLS credentials as a leading provider of enterprise Microsoft products in Australia bringing more than 250 specialist enterprise software developers to Telstra.

Productivity improvement: In FY17, Telstra reduced its underlying fixed costs by $244 million, consistent with its announcement in November 2016 that it would achieve at least $1 billion in productivity by FY21. Currently, it is accelerating its efforts to reduce costs even further over the next five years. Importantly, the company brought forward its previously announced $1 billion net productivity target by one year to FY20, while increasing target by a further $500 million in cost savings and plans to deliver more than $1.5 billion in net productivity by FY22.


Product EBITDA performance; (Source: Company reports)

NBN Monetisation arrangements: Recently, the group had updated about its proposal to monetise a portion (worth between $5-5.5 billion) of its locked-in recurring nbn receipts. However, it did not receive technical consent from nbn co to proceed further. There are essentially two streams of payments to Telstra from the NBN. Firstly, ongoing receipts for access to Telstra’s extensive infrastructure including its fibre, exchanges and ducts which will increase in line with the roll out of the NBN. Secondly, one off receipts of approximately $9 billion, net of the costs to connect. These partly, but not fully compensate Telstra for giving up this aspect of its business to NBN. Accordingly, the negative impact of the migration to nbn on Telstra is expected to be $3bn per annum after the infrastructure access receipts. It was these infrastructure access receipts that the company was seeking to potentially monetise.  Importantly, Telstra’s intention was to use the proceeds to reduce debt by around $1bn, with the balance to support a capital management program to enhance shareholder returns, most likely through a series of on and off market buy-backs.


nbn DA income and commercial works; (Source: Company reports)

Set to combine Foxtel and FOX SPORTS Australia: In August 2017, Telstra and News Corp announced about their strategy to combine Foxtel and Fox SPORTS Australia into a new premium sports and entertainment company, one that is well positioned to deliver premium sports as well as homegrown, original and international entertainment in a rapidly evolving and competitive marketplace. Further, the move to combine the companies will align ownership and management at a time when more Australians are consuming premium content across more technologies and platforms than ever before. The transaction is expected to be completed in the first half of 2018 and in the new company, News Corp and Telstra will hold 65% and 35% shareholding, respectively.


Product performance: Media – Foxtel; (Source: Company reports)

Capital Raising through Debt Issuance Program: During the year, Telstra announced 15 billion euros ($A22.30 billion) capital rising through a debt issue in Singapore. The group has announced an A$1 billion bond issue under its Debt Issuance Program and this includes three tranches - A$300 million four-year fixed rate notes with a coupon of 2.90 per cent maturing on April 19, 2021, A$150 million four-year floating rate notes with a coupon of three-month BBSW (Bank Bill Swap reference rate) and 0.82 per cent maturing on April 19, 2021, and A$550 million 10-year fixed rate notes with a coupon of 4 per cent maturing on April 19, 2027. The group intends to use the proceeds from the notes for capex and general corporate purposes.

FY18 Guidance: For FY18, Telstra expects total income in the range of $28.3 - $30.2 billion and EBITDA of $10.7 - $11.2 billion (after absorbing incremental restructuring costs of $200 – $300 million to support the increased productivity). Moreover, $2 - $2.5 billion of total EBITDA is expected to come from net one-off nbn Definitive Agreement receipts less nbn net cost to connect. On the other hand, capital expenditure is expected to be between $4.4 - $4.8 billion or approximately 18% capex to sales and free cashflow is expected to be in the range of $4.4 - $4.9 billion. Accordingly, it expects total dividends in respect of FY18 to be 22 cents per share fully-franked, including both ordinary and special dividends.


FY18 Guidance; (Source: Company reports)
 
Stock Performance: TLS stock has fallen 20.1% in the last six months as on September 08, 2017, impacted by the network disruptions during the first half of 2017, TPG’s entry as a fourth mobile network operator, and nbn co.’s latest move with regards to nbn receipts monetisation proposal. However, the group has been achieving strong growth in new customers across the portfolio and has made good progress on the productivity program in H2FY17. During FY17, around $750 million in strategic investment was delivered into the networks for the future and digitisation programs laying the foundations to drive improvements in FY18 and beyond.  Further, TLS mobile network has been extended so that 88.9% of the Australian population now have access to double the speed of standard 4G, and more than 83% of ADSL customers now have access to ADSL speeds that support a quality video experience. Further, Telstra has laid core network foundations to support 5G at its trials on the Gold Coast in FY18. These investments will position TLS to deliver significant customer benefits and reinforce its market differentiation over the longer term, as well as deliver financial benefits such as capital efficiency and reduced operating costs. Given the ongoing investments, improvement in productivity gains, and increasing market share with new product launches, we give a “Buy” recommendation on the stock at the current market price of $3.72


TLS Daily Chart (Source: Thomson Reuters)
 

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