Telstra Corporation Limited

TLS Details

Telstra Corporation Limited (ASX: TLS) operates through Telstra Consumer and Small Business, Telstra Enterprise, Telstra InfraCo, Networks and IT, All other services. Under Telstra Consumer and Small Business, it offers telecommunication products, services, and solutions across mobiles, fixed and mobile broadband, media and digital content to Australia's consumer and small business customers.

Result Performance for the Year Ended 30 June 2021 – FY21

• The revenue (excluding finance income) from ordinary activities stood at $21,558 million in FY21, down 9.1% YoY, and profit for the year stood at $1,902 million in FY21, up 3.4% YoY.
• Underlying EBITDA decreased 9.7% to $6.7 billion, indicating an estimated $650 million of in-year nbn headwind and ~$180 million of negative YoY impacts related to COVID-19.
• Due to better working capital requirements and more than offsetting lower EBITDA, free cash flow increased 11.6% to $3.8 billion in FY21, above the top end of the guidance.

Source: Company Reports, Analysis by Kalkine Group

Key Update:

• On 8 December 2021, the company invested $616 million to secure 2x10MHz in the Australian Communications and Media Authority’s 850/900 MHz band auction.

Outlook

With the T22 program, the company is firmly positioned to accelerate growth, driven by transformation work done in the past to take advantage of continued disruption, emerging technology shifts and the growing digital economy. For FY22, the company anticipates total income to be in the range of $21.6-$23.6 billion, underlying EBITDA to be $7.0-$7.3 billion, capital expenditure to be $2.8-$3.0 billion and free cashflow after lease payments to be $3.5-$3.9 billion. Acceleration in underlying EBITDA is forecasted despite nbn headwinds of ~$350 million. Underlying EBITDA in FY22 includes ~$50 million of non-cash accounting headwind from insourcing the retail channel and zero return from international mobile roaming. Further, it plans to reduce cumulative costs by $2.7 billion by FY22.

Key Risks

The proposed legal restructure of the Telstra group is expected to result in the new holding company and the establishment of three key subsidiaries, ServeCo, InfraCo Fixed and InfraCo Towers. There is a risk that this plan may be delayed or not successfully completed, reducing the optionality and opportunity the company must realize additional value from infrastructure assets. With the T22 strategy, the company plans to keep pace with the rapid rate of change around the business with persistent COVID-19 related challenges.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Stock Recommendation

The company has delivered 6-month and 1-year return of ~+15.69% and ~+37.97%, respectively. In addition, the stock is trading higher than the average of the 52-week high price of $4.12 and the 52-week low price of $2.93.

The stock has been valued using an EV/Sales multiple based relative valuation (on an illustrative basis), and the target price so arrived reflects a fall of low double-digit (in % terms). In addition, a slight discount has been applied to peer average EV/Sales multiple (NTM) (Peer Average), considering higher debt to equity at 1.20x in FY21 versus the industry median of 0.43x and feeble industry dynamics due to COVID-19 related circumstances.

Considering the technical analysis, recent returns, risks associated, and current trading levels, we believe it is prudent to book profits in the stock. Thus, we give a ‘Sell’ recommendation at the current price of $4.115 per share as of 14^th December 2021 (Time: 12:30 PM (GMT+10), Sydney, Australia).

Technical Overview

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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