Telstra Corporation Limited

TLS Details

TLS to Deal with Fine of up to $50 million: Telstra Corporation Limited (ASX: TLS) is a telecommunications carrier, which provides telecommunications and information services, including mobiles, internet, and pay television. As on 26 November 2020, the market capitalization of the company stood at ~$36.86 billion. As per the Australian Competition & Consumer Commission, the company is likely to face the court and penalties of up to $50 million for potential breach of consumer laws for poor sales practices. The company unconsciously sold over 100 unaffordable consumer phone contracts to consumers with poor reading and speaking skills. The company has admitted that its staff took the benefit of the indigenous customers to sell mobile plans. However, the company has taken steps to provide full refunds with interest and waived debts.

FY20 Financial Highlights: During FY20, TLS added 240,000 retail postpaid mobile services, including 154,000 from Belong. Total income for FY20 amounted to $26.1 billion, reflecting a fall of 5.9% over pcp.  In addition, underlying EBITDA for the period stood at $7.4 billion and NPAT of the company witnessed a fall of 14.4% over pcp to $1.8 billion. During FY20, the Board declared a total fully franked dividend of 16 cents per share and returned $1.9 billion to its shareholders. At the end of FY20, the company had a cash balance of $499 million and gross debt of $17,343 million.

FY20 Financial Highlights (Source: Company Reports)

Future Expectations and Outlook: The company is expecting to return to revenue and EBITDA growth by FY22, due to the growth in 5G networks and focus on the enterprise segment. The company’s 5G network has reached 44% of the Australian population and is likely to expand to 75% by June 2021. The T22 strategy is placing the company in a decent position and is likely to accelerate the digital economy. TLS is working to generate net productivity of $2.5 billion by FY22 and expects underlying EBITDA in the range of $7.5 billion to $8.5 billion in FY23, equating to an estimated ROIC of ~8%. It is also targeting cost reductions in FY21 through indirect and direct labor, ongoing shift of customers onto digital sales, and via a strong focus on vendor costs and workforce efficiency.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company is progressing on its T22 strategy and is showing financial strength and stability. The stock of TLS gave a return of 5.25% in the past three months and a return of 14.57% in the last one month. The stock is currently trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. On a technical analysis front, the stock of TLS has a support level of ~$2.935 and a resistance level of ~$3.256. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of high single-digit (in percentage terms). For the purpose, we have taken peers such as Vocus Group Ltd (ASX: VOC), Uniti Group Ltd (ASX: UWL) and Service Stream Ltd (ASX: SSM). Considering the growth in 5G network, decent long-term outlook, and current trading levels, we recommend a ‘Hold’ rating on the stock at the current market price of $3.110 per share, up by 0.322% on 26 November 2020.

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

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