Telstra Corporation Limited 

TLS Details

TLS Rides in T22 Strategies: Telstra Corporation Limited (ASX: TLS) is engaged in the provisioning of telecommunication and information services. The market capitalisation of the company stood at ~$33.06 billion as on 13 October 2020. FY20 was a year of considerable success for Telstra Corporation, wherein it saw continued progress on its T22 transformation strategy. TLS continued to grow its customer base, while reaching one third population coverage with its 5G network

Growth in Customer Base: The company continued to deliver growth in its subscribers and added 240,000 retail post-paid handheld mobile services during FY20. With the onset of the COVID-19 pandemic, total income for FY20 went down by 5.9% to $26.2 billion and reported EBITDA stood at $8.9 billion. In the same time span, NPAT of the company decreased 14.4% to $1.8 billion. During the year, the company retained a healthy balance sheet with A-band credit ratings and net assets of $15,147 million. During FY20, the company progressed on its digital platform and made over 71% of its service transactions via digital channels. The decent operational performance enabled the Board to pay a fully franked final dividend of 8 cents per share, bringing the total dividend for FY20 to 16 cents per share.

Key Financials (Source: Company Reports)

Outlook: The company is focused on ensuring energy-efficient networks and is aiming to deliver on its strategic ambitions. TLS is focused on delivering its productivity target of $2.5 billion, including $400 million in FY21. The company expects FY21 total income in the range of $23.2 billion to $25.1 billion, and underlying EBITDA in between $6.5 billion to $7.0 billion. It also expects capital expenditure in the range of $2.8 billion to $3.2 billion and free cashflow in between $2.8 to $3.3 billion. The acceleration in the company’s digital channels and the reduction in costs will help the company to benefit from the increasing opportunities in the long term.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: During FY20, the company returned $1.9 billion to shareholders. The company has invested and would continue to invest, for long-term returns and opportunities. Over the span of five years, the company has maintained a positive free cash flow, which indicates prudent use of working capital. On the technical analysis front, the stock of the company has a support level of ~A$2.756 and a resistance level of ~A$3.071. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Vocus Group Ltd (ASX: VOC), Uniti Group Ltd (ASX: UWL), REA Group Ltd (ASX: REA), to name few, and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the growing customer base, guidance for FY21, and investments for future growth, we give a “Buy” recommendation to the stock at the current market price of A$2.890 per share, up by 3.956% on 13 October 2020.

TLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

IOOF Holdings Limited

IFL Details

IFL Receives Lender’s Consent: IOOF Holdings Limited (ASX: IFL) is involved in providing financial advice and distribution, along with portfolio and estate administration, and investment management solutions. The market capitalisation of the company stood at ~$2.13 billion as on 13 October 2020. Recently, IFL stated that it has received approval from all lenders in the existing senior debt funding facility for the proposed acquisition of NAB’s wealth management business (MLC). IFL has received an additional $250 million senior debt obligation. This, together with the establishment of a new lender offers better diversification to the total debt facilities.

Completion of Capital Raising: On 21st September 2020, the company announced that it has finished the retail component of its fully underwritten 1 for 2.09 accelerated non-renounceable entitlement offer and non-underwritten share purchase plan. This took the total capital raising to around $1,043.8 million. The company intends to utilise the proceeds from the offer to partly finance the acquisition of NAB’s wealth management business (MLC) for A$1,440 million, which is subject to completion adjustments.

Sneak Peek at FY20’s Key Results: During FY20, the company reported statutory NPAT amounting to $147 million and funds under management, advice, and administration (FUMA) of $202.3 billion. During the year, the company received net proceeds of $105 million from divestments of non-core subsidiaries. Over the year, the company’s gross margin increased by 16.3% to $577.6 million. The company recently declared a fully franked dividend of 11.5 cents per share.

Key Financials (Source: Company Reports)

What to Expect: The company is likely to deliver EPS accretion in excess of 20% on the FY21F pro forma basis. The company is aiming to return on funds employed of around 15% by the third full year of ownership. The company will conduct its Annual General Meeting on 25 November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Debt to equity of the company stood at 0.33x in FY20 as compared to the industry median of 0.53x. The stock of IFL has corrected 31.13% and 12.6% in the past three and six months, respectively. As a result, the stock is trading towards its 52-week low levels of $2.505, offering decent opportunities for accumulation. On a technical front, the stock of IFL has a support level of ~$2.498 and a resistance level of ~$4.324. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Challenger Ltd (ASX: CGF), AMP Ltd (ASX: AMP), Pendal Group Ltd (ASX: PDL), to name few, and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the recent capital raising, deleveraged balance sheet, better diversification to the total debt facilities and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.26 per share, down by 0.912% on 13 October 2020.

IFL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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