Telstra Corporation Limited

TLS Details

Increased Presence in 5G: Telstra Corporation Limited (ASX: TLS) is engaged in providing telecommunications and information services for domestic and international customers. It operates through four segments: Telstra Consumer and Small Business, Telstra Enterprise, Networks, and IT(N&IT) and Telstra InfraCo. The company has announced regarding securing 1000MHz from the auction of 26GHz spectrum. With an investment of $277mn, TLS is likely to expand its leadership presence in 5G network. TLS, 5G technology encompasses two-thirds of the Australian population. The company has more than 3200 TLS 5G sites in more than 160 cities and towns in Australia.

Recent Update on $1.5mn of Penalty for TLS:   On 4 May 2021, TLS is penalised with more than $1.5mn on account of delay in transferring customer numbers. After an investigation by the Australian Communications and Media Authority (ACMA), it was founded that most of the numbers were not transferred to other telcos. Notably, the company suspended its local porting operations after witnessing COVID-19-led uncertainties on its offshore operations. Regulator has decided a nominal penalty for TLS on the back of impacts from Covid-19 situation, resulting in insignificant impact on TLS’s financials.  

1HFY21 Financial Highlights: The company has registered a decline in its total income to $12,015mn in 1HFY21 as compared with $13,413mn in 1HFY20. Similarly, the company has posted a decline in its profits to $1,125mn in 1HFY21 as compared with $1,150mn in 1HFY20, on the back of $170mn impact from Covid-19. The company has witnessed an improvement in its cash and cash equivalent situation at $1,295mn as on 31 December 2020 against $499mn as on 30 June 2020.

Cash Position (Source: Company Reports)

Key Risks: The company is exposed to Covid-19 related risks, which has impacted the profitability of the company. The company is exposed to foreign exchange risks. Any adverse movement in foreign exchange prices may lead to financial losses for the company. The company is exposed to liquidity risk. There is always a risk for the company to get failed in meeting its financial obligations as and when they are due to pay.

Outlook: TLS is targeting its capex to sales ratio to reach at ~12% (excluding Spectrum) from FY23. The company is targeting its FY22 cost in a range of $2.5bn to $2.7bn. TLS is likely to strengthen its balance sheet through asset monetisation including passive infrastructure assets, including towers. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, the stock of TLS has inclined by ~2.94% and by ~11.44% in the last three months. The current market capitalisation of TLS stands at ~$41.50bn as of 4 May 2021. The stock is currently trading above the average 52-week price level range of ~$2.66-~$3.53. On the technical analysis front, the stock has a support level of ~$3.369 and a resistance of ~$3.594. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering expanding presence in 5g network across Australia and improvement in its cash position. For this purpose, we have taken peers Macquarie Telecom Group Ltd (ASX: MAQ), Vocus Group Ltd (ASX: VOC), TPG Telecom Ltd (ASX: TPG), to name a few. Considering a leadership position in 5G network in Australia, increase in cash and cash equivalents, strengthening balance sheet through asset monetisation, and valuation, we recommend a “Hold” rating on the stock at the current market price of $3.50, up by ~0.286% as on 4 May 2021.

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

Nine Entertainment Co. Holdings Limited

NEC Details

Leading Audience Shares in Broadcast: Nine Entertainment Co. Holdings Limited (ASX: NEC) provides news for business and finance, lifestyle, entertainment, and sports. Its segments include Broadcasting, Digital and Publishing, Domain Group and Stan. The company is witnessing a robust growth in its broadcast segment through its channel nine, registering leading audience share. NEC’s radio network has also been increasing consistently since 2019 with an increased audience share of 14.5% in 2021 against 12.7% in 2019. The digital business segment is also witnessing a robust audience growth with 35% increase for Stan in total viewing, 73% increase in App launches for Domain, 40% increase in listing views and 19% increase in streams for 9NOW.

1HFY21 Financial Highlights: The company has registered a decline in its revenues to $1,165.05mn in 1HFY21 against $1,195.68mn in 1HFY20. Despite a decline in revenues, the company has registered a profit of $181.85mn in 1HFY21 against $101.86mn in 1HFY20, on the back of decline in expenses. The company has seen a decline in its cash and cash equivalent position to $114.42mn as on 31 December 2020 against $187.39mn as on 30 June 2020.

Revenue and Net Profit (Source: Company Reports

Key Risks: The company is exposed to interest rate risk. Any adverse movement in interest rates may lead the company to incur higher interest on borrowings, resulting in financial losses for the company. The company is exposed to foreign exchange risks. Any severe movement in foreign exchange prices may lead to financial losses for the company.

Outlook: NEC expects more than 35% of the group’s revenues coming from subscription by FY24.  NEC is expecting its growth on track to deliver ~60% of EBITDA from digital business by FY24. Video on Demand (VOD) segment is likely to contribute ~30% to NEC’s revenue by FY24. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, the stock of NEC has increased by ~2.84% and by ~9.46% in the last three months. The current market capitalisation of NEC stands at ~$4.80bn as of 4 May 2021. The stock is currently trading above the average 52-week price level range of ~$1.295-~$3.160. On the technical analysis front, the stock has a support level of ~$2.71 and a resistance of ~$2.988. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in audience share across business segments and an increase in bottom-line. For this purpose, we have taken peers HT&E Ltd (ASX: HT1), Seven West Media Ltd (ASX: SWM), Southern Cross Media Group Ltd (ASX: SXL). Considering the company has posted an increase in profit despite a decline in revenue, rising audience share, positive outlook, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $2.89, up by ~2.482% as on 4 May 2021.

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

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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