Telstra Corporation Limited
Trying to bring a turnaround in performance: Telstra Corporation Limited (ASX: TLS) is a well-diversified telecommunication company with the principle activity of providing mobile phones, mobile devices, home phones and broadband internet services in Australia market. The company has five main business verticals, i.e., consumer and small business segment, Enterprise, Wholesale, Operations, and Others which contributed around 51%, 28%, 10%, 4%, and 7% revenue in total revenue respectively, in FY18.
FY18 was the challenging year for the company wherein its product mix segment was impacted by lower earnings than expected due to rise in competition for mobile customers and the impact of NBN rollout. The company posted a flat revenue of $26,011 Mn in FY18 compared to $26,013 million in FY 2017 due to the intense competition for mobile customers and the impact of NBN rollout. As a result, Profit attributable to the equity shareholders of Telstra was down by 8.4% to $3,563 million against $3,891 million in FY17. Moreover, EPS contracted for the FY18 at 30.0 cents per share compared to 32.5 cents per share in FY17. Based on the performance, the Board of Director reduced its fully franked full-year dividend from 31 cents per share to 22 cents per share in FY18, equating to a payout ratio of 65% of net profit after tax including net one-off nbn receipts. However, the group has consistently distributed stable dividends with healthy payout ratios. We expect that the company is likely to continue its high dividend payout policy in years to come. The company has the annual dividend rate of 4.67%.
Lately, the group announced that there will be no change to its capital management framework and forecasted its Capex to sales ratio in the range of 16% to 18% in FY19, while Capex to sales ratio is expected to be around 14% over the medium term. As per the management, the company witnessed the subdued performance in 2018 because of the stiff competitive pressures and is expecting the same to continue in 2019. Importantly, the company is also expected to have some impacts from the new NBN plan going forward and this is yet to be seen. We are also expecting higher operating expenses in years ahead due to rise in NBN access payments, mobile hardware, NAS growth and cost to connect expenses. Otherwise, the top line has grown at CAGR of 2.5% over the period of FY14-18 whereas EBITDA declined at CAGR of 2.4% over the same period. Resultantly, the group has recorded NPAT degrowth at CAGR of 5.1 per cent over the five years. However, we expect that the enterprise business segment could be a next growth driver for the company backed by its innovation and capability to provide the one-stop shop for all Business -to- Business technology needs, offering a modular, curated, self-service and simplified product portfolio to the enterprise consumers.
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We are of the view that the company has the potential to perform better in the long run as they have recently introduced Telstra 2022 Strategy which could be a game changer for the company.The company is looking to make the required changes in structure and leadership to ensure the deliverance of all the commitments made to the customers. The primary aim of the company would be to simplify its products and services. To achieve the aforementioned, Telstra has announced the end to end products and technology division. The group’s strategy, Telstra 2022 is expected to mitigate challenges while nbn roll-out with 5G services at scale and Internet of Things will be at full throttle. The group also intends to remove the need for one-third of customer service calls within two years and two-thirds within four years, with the better lead in key industry surveys for network performance. The productivity target is expected to be enhanced by a further $1 billion to $2.5 billion with monetization planned up to $2 billion in assets over the next 24 months.
Hence, we expect that the company will rebound its growth momentum fuelled by improvement in fundamentals along with top management structural changes, simplification of its product portfolio, and continuous product innovation. Meanwhile, TLS has performed well over past three months generating a positive return of 20.66% and shares look bound to move higher from the current level. We believe that slew of positive developments and better FY19 would fuel the stock a bit higher from the current levels of $3.25. Hence, we maintain “Hold” recommendation on the stock.
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