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Telstra under pressure but doing better than many expected

19 Aug 2021 2 month(s) ago

Fixed line revenue is falling, but mobile looks strong.

Telstra is a $47.5 billion company and the biggest play in the Australian market in telecommunications. For those reasons alone it should be watched by investors.

First, the basic stats. Morgan Stanley has a price target of $4.20 but is expecting declines in earnings per share (EPS), revenue, profits (EBITDA), and dividend yield. None of these estimates are especially encouraging. Moreover the price earnings ratio (the price of the share divided by the earnings per share) is expected to go higher, another negative indication.

Now the broker analytics, which suggest Telstra may be doing rather better than the market expected. Macquarie said the 2020-21 financial year result was above expectations, but believes “fixed headwinds” will affect growth for TLS in the medium term. “Mobile margin was back at 41% in second half of 21. In 2020-22 we expect further mobile revenue and EBITDA (earnings) growth. Total operating expenses were down $1.8bn, more than 10% and underlying fixed costs were down $490m. 

“Telstra provided 2021-22 EBITDA (earnings) guidance for the first time of $7.0-7.3bn which represents 4%-9% growth over 2020-21. This is in line with the group’s prior aspirations for mid- to high-single-digit growth.”

JP Morgan says Telstra recorded earnings (EBITDA) growth for the first time since 2017-18. "EBITDA grew 1% in the June 2021 half (the first half of growth since FY2018) and guidance is for EBITDA to grow 5-9% in FY2022. Growth is being driven solely from Mobile with the company reporting positive APRU growth and higher subscribers. Headwinds remain in the Fixed business with margins continuing to decline in the June 2021 half.

“Management remains committed to the A$7.5-$8.5 billion EBITDA target for FY2023 but we believe this relies on significant cost reductions and likely ARPU increases in Fixed. Notwithstanding the risks in Fixed (line revenue), with the stock price well below our net present value and opportunities for further asset sales, we remain positive on the stock.

Morgan Stanley says the 2020-21 results are “supportive of our positive thesis and consensus expectations. It says there was a positive surprise with second half mobile earnings for the first time in 4-5 years. It says a $1.4 billion share buyback is confirmed and the broker is keeping an overweight recommendation.

Telstra's share price has done alright compared to the wider market:

 

 

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