Australia | Jul 01 2021
This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS
Telstra has wrapped up a deal for its mobile towers at a full price while also retaining a controlling stake
-Transaction completed early and price well ahead of most broker estimates
-Telstra expects to return 50% of net proceeds of $2.8bn
-Higher mobile pricing also appears to be stickier
By Eva Brocklehurst
Telecommunication infrastructure assets are in high demand and Telstra Corp ((TLS)) has wrapped up a deal that is ahead of expectations in terms of timing and price, bypassing the auction process that was to take place in the December half.
The sale of 49% of the mobile towers business is at a higher value than brokers anticipated, at an implied $5.9bn. This compares with Morgan Stanley's estimates of $3.6-4.8bn. The broker acknowledges there is an element of financial engineering in all sale/leaseback transactions yet this one appears to be genuinely superior.
Still, it is important to keep the transaction in perspective. The broker's forecast for FY22 mobile tower operating earnings (EBITDA) of $250m represents just 3% of Telstra's total estimated EBITDA of $7.5bn for FY22, so it is relatively small.
Telstra had indicated it would run a formal sales process and close a deal in 2022 but now aims to settle this transaction in the first quarter of FY22. The reason an early agreement was reached, Morgan Stanley notes, was the consortium backed Telstra's control, and the multiple offered, around 24x FY22 enterprise value/EBITDA, is at the high-end of global precedents for tower assets.
Credit Suisse also expected the sale of the towers would be a positive catalyst but the price is well ahead of what it considered was reasonable. Importantly, Telstra maintains majority ownership and control over its towers.
For Morgans, the deal shows management is serious about taking the steps required to release value. The broker is now more confident in assessing Telstra's worth around $4.50 a share if the sum of the parts can be realised and upgrades to Add from Hold. Prior tax losses are expected to shield Telstra from deal-related tax and with a controlling stake there is minimal impact on earnings.
Telstra expects net proceeds of $2.8bn of which 50% will be returned to shareholders and the remainder applied to debt reduction to keep the transaction credit-neutral. The company will also invest $75m of the proceeds to enhance connectivity in regional Australia and the remainder on debt reduction.
Following the divestment Ord Minnett expects Telstra will opt for a share buyback rather than an additional dividend. At the current price, the broker estimates a $1.4bn share buyback would be 1% accretive to value.
Credit Suisse also assesses the company could undertake a $1bn buyback and still maintain its $0.16 dividend in FY22. The deal is also positive for debt metrics with FY22 pro forma debt servicing ratio likely to fall to under 1.8x, well inside management's comfort zone of 1.5-2.0x. In the broker's view, this should eliminate any lingering concern the dividend may be lowered.
Following on from the transaction, Morgan Stanley estimates the market is now valuing Telstra's infrastructure business, which generates around $2.5bn in operating earnings, at only 9.4x for FY22, so there is even greater potential to drive a re-rating of Telstra shares.
Options to unlock further value are likely to be longer dated but the broker envisages upside still exists. Other infrastructure assets include the company's subsea cables, fibre and exchanges as well as the 30-year contract with the NBN.
Credit Suisse had previously considered the trading multiples of European operators the best comparable on the basis their towers have been spun out of integrated telcos, and commercial agreements were maintained with anchor tenants.
Yet the implied valuation for the Telstra towers is broadly in line with the higher trading multiples of US operators and this is considered an excellent outcome given Telstra retains control while the US operators are independent.
Telstra has a 15-year agreement, with potential for extension, with the consortium, comprising the Future Fund, Commonwealth Superannuation Corp and Sunsuper, to secure ongoing access to existing and new towers.
Morgans also believes the transaction proves that Telstra retaining control has not discouraged potential investors and could signal strong demand for other parts of the portfolio. The broker also notes industry pricing appears to be improving with mobile plan increases being maintained over the last two months.
For example, Optus added $6 per month to its post-paid mobile plan pricing in May and included more downloads for the higher price, retaining the pricing in June. Morgans calculates dollars per gigabyte have been broadly stable over the last six months and increasing revenue per unit is a major requirement for better returns after years of downward pressure.
FNArena's database has five Buy ratings for Telstra. The consensus target is $4.07, suggesting 8.2% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.3%.
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