Telstra Corporation Limited

TLS Details

Telstra Corporation Limited (ASX: TLS)  is a telecommunications and technology company providing services to domestic and international customers, operating through four segments: Telstra Consumer and Small Business, Telstra Enterprise, Networks and IT(N&IT) and Telstra InfraCo. The company is engaged in sales and contract management for medium to large business and government customers in Australia and globally.

Divestments in the Tower Business: TLS sells its 49% stake in Telstra InfraCo for $2.8 billion, making the towers entity debt-free and proposes to distribute half of the cash proceeds to its shareholders. Out of the cash proceeds, $75 million will be invested to enhance connectivity in the Australian region. The transaction valued the tower entity at $5.9 billion. The deal is expected to close in the first quarter of FY22. TLS intends to use 50% of the proceeds to pairing down debt which currently stood at ~$15.1 billion as of December 2020. The management to decide the manner in which it can reward shareholders through buybacks, etc. by August 2021. A consortium comprised of the Future Fund, Commonwealth Superannuation Corporation and Sunsuper will become strategic investors in the tower business.

Delisting and Business Consolidation: The Telstra Board decided to consolidate its business by delisting the stock from the Main Board of NZX and working under the single listed entity in Australia, focusing on the operations and making it more efficient.

Financial Highlights for 1H FY21: The company reported a decline in revenue by 10.4% for the 1HFY21 to reach $12 billion as compared against $13.4 billion in the prior year. Underlying EBITDA, on a guidance basis, declined by 14.2% to $3.3 billion even after excluding one-offs. Nevertheless, TLS posted a record increase in free cash flow, which had increased by 75.4% to $2.67 billion in H1FY21. It had closed the period with a cash balance of $1.29 billion as of December 2020. Debt levels seems on the higher side, with gearing ratio stood at 51.5%.

Financial Performance (Source: Company Report)

Key Risks:

TLS is exposed to foreign exchange volatility which off late decreased the revenues by $36 million, which were impacting the EBITDA contribution of $5million. The company expect a $400 million impact from the COVID -19 in FY21, which is double that of $200 million in FY20.

Outlook:

TLS released its underlying EBITDA guidance for the 2HFY21 in the range of $3.3-$3.6 billion as compared to the 1HFY21 EBITDA of $3.3 billion. Full-year FY21 underlying EBITDA is expected to be in the range of $6.6-$6.9 billion (vs. $6.5-$6.9 billion). Further, the company announced the capital expenditure to be in line with the previous year's footprints and upgraded the free cash flows in the range of $3.3-3.7 billion (up from the earlier estimate of $2.8-3.3 billion).

Valuation Methodology: Enterprise Value/ Sales Multiple (Illustrative)

Stock Recommendation:

The stock of TLS gave a return of ~+10.59% in the last three months and a return of ~+26.51% in the last six months. The stock is trading above the average of the 52-week low price of $2.660 and the 52-week high price of $3.780. On the technical front, the stock has a support level of $3.60 and a resistance level of $3.96. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of a low double-digit (in percentage terms). We believe that the stock can trade at a slight premium as compared to its peer average EV/Sales (NTM trading multiple) considering the positive impact on the sale of tower business which will likely reduce debt levels and reward shareholders. For this purpose, we have taken peers such as Tominzone Ltd. (ASX: TOM), Vocus Group Ltd. (ASX: VOC), Macquarie Telecom Group Ltd. (ASX: MAQ), to name a few. The impact of divestment of tower business will be visible in FY22 results. The management is yet to give clarity on the deal and revise guidance accordingly. The method of rewarding shareholders is yet to be explored. Considering the initial facts from the deal announcement, improvement in free cash flows in H1FY21, the current trading levels, and valuation, we recommend a “Hold” rating on the stock at the closing price of $3.760, up by 4.44% as of 30 June 2021.

TLS Daily Technical Chart, Data Source: REFINITIV

Note: The yellow color line in the chart shows the trend line and the purple color line represents RSI (14-period). The green color line indicates 12-period SMA.

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.

Technical Indicators Defined: -

• Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

• Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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