Stocks’ Details
 

Telstra Corporation Limited

Update on Impacts of COVID-19: Telstra Corporation Limited (ASX: TLS) is a telecommunication carrier which provides telecommunications and information services, including mobiles, internet, and pay television. As on 20 March 2020, the market capitalization of the company stood at $38.89 billion. The company has recently responded on COVID-19 impact and stated that it is holding any further job reductions and is suspending late payment fees and disconnections, providing relief to small businesses. 

Growth in Customer Numbers: The company has recently released its interim results for the period ending 31 December 2019, wherein it reported a total income of $13.4 billion and NPAT of $1.2 billion. During 1H20, the company continued to make strong progress in delivering its T22 strategy and delivered growth in customer numbers. The Telstra Board resolved to pay a fully franked interim dividend of 8 cents per share. 

     
1H20 Financial Highlights (Source: Company Reports)

Future Expectations and Guidance: COVID-19 has a profound impact on business across the country and like many other companies it is likely to affect the business of TLS. The company’s outlook remains within the range of its FY20 guidance and expects total Income in the range of $25.3 to $27.3 billion. It also anticipates EBITDA to be at the bottom end of the range of $7.4 to $7.9 billion, restructuring costs of around $300 million, and capital expenditure around the top end of the range of $2.9 to $3.3 billion. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of TLS is trading close to its 52-weeks’ low level of $2.9, proffering a decent opportunity for accumulation. During 1H20, EBITDA margin witnessed a slight improvement on the previous half and stood at 30.5%, up from 29% in 2H19. In the same time span, Return on Equity stood at 7.8%, higher than the industry median of 4.9%. Considering the current trading levels, improvement in EBITDA margin and higher ROE and decent growth opportunities, we have valued the stock using EV/Sales multiple based relative valuation and arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered TPG Telecom Ltd (ASX: TPM), Vocus Group Ltd (ASX: VOC), etc., as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $3.070, down by 6.116% on 20 March 2020. 

Vocus Group Limited

Sales Momentum and Increase in EBITDA: Vocus Group Limited (ASX: VOC) is a telecommunications provider, operating in the Australian and New Zealand markets. As on 20 March 2020, the market capitalization of the company stood at $1.32 billion. The company has recently released its interim results for the period ending 31 December 2019 wherein it reported clear progress on its three-year turnaround strategy. During 1H20, the company saw good sales momentum and reported an increase of 5% in revenue to $305.7 million and a growth of 11% in EBITDA to $111.2 million.


1H20 Vocus Network Services P&L (Source: Company Reports)

Future Guidance: The company has provided guidance for FY20 and expects a growth of 10-15% in Vocus Network Services Underlying EBITDA to $20 million to $30 million. It also expects group underlying EBITDA to be between $359 million to $379 million and is anticipating stronger 2H performance. VOC estimates its capital expenditure to be around $200 million to $210 million. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of VOC is trading close to its 52-week low of $2.070, proffering an excellent opportunity to enter the markets. During 1H20, gross margin of the company witnessed an improvement over the previous half and stood at 43.7%, up from 42.5% in 2H19. In the same time span, EBITDA margin of the company went up to 20.6% from 19.9% in 2H19. Considering the trading levels, improvement in margins and future guidance, we have valued the stock using EV/Sales multiple approach and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Telstra Corporation Ltd (ASX: TLS), TPG Telecom Ltd (ASX: TPM), etc., as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $2.260, up by 6.103% on 20 March 2020. 

TPG Telecom Limited

ACCC won't Appeal Court's TPG-Vodafone Merger Decision: TPG Telecom Limited (ASX: TPM) provides consumer, wholesale and corporate telecommunications services. As on 20 March 2020, the market capitalization of the company stood at $6.49 billion. The company has announced that ACCC will not appeal the Federal Court decision for the proposed merger between TPG Telecom and Vodafone Hutchison Australia. 

Improvement in Revenue and NPAT: The company has recently released its interim results for the period ending 31 December 2019, wherein it reported a slight improvement of 1% in revenue of $1,246.5 million and an increase in NPAT to $143.6 million from $46.9 million in 1H19. This resulted in a rise of EPS to 15.5 cents per share from 5.1 cents per share. The decent financial performance enabled the Board to declare an interim dividend of 3 cents per share which is to be paid on 19 May 2020. 

 
1H20 Reported Financial Highlights (Source: Company Reports)

Growth Opportunities and Future Guidance: The company has provided guidance for FY20 and expects BAU EBITDA to be in the range of $775-785 million and capex between $200-240 million.

Stock Recommendation: As per ASX, the stock of TPM gave a return of 4.48% on the YTD basis. During 1H20, EBITDA margin of the company stood at 32.8%, higher than the industry median of 31.7%. In the same time span, net margin of the company was 11.6% as compared to the industry median of 7.9%. On TTM basis, the stock is trading at an EV/Sales multiple of 3.4x, lower than the industry average (Telecommunications Services) of 17.1x. Considering the returns, higher net margin and positive guidance, we recommend a “Hold” rating on the stock at the current market price of $7.2, up by 2.857% on 20 March 2020.

 
Comparative Price Chart (Source: Thomson Reuters)

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