Australia | Aug 16 2021
After years enduring headwinds from the roll-out of the NBN, Telstra is currently enjoying strong free cash flow. Is it time for a hike in dividends?
-Many positives emerging amid earnings growth for the first time in 4-5 years
-Focus now on restructure, 5G and health opportunities
-Mobile key to delivering Telstra's FY23 ambitions
By Eva Brocklehurst
It has been a while since Telstra Corp's ((TLS)) results inspired so much confidence. After several years of questioning the sustainability of dividends, brokers are now more confident the pay-out will be easily supported by operating earnings in FY22 and FY23.
Free cash flow is running ahead of expectations and Credit Suisse is now of the view this can justify an increase in the dividend from the current $0.16. Admittedly, this could be constrained by the availability of franking credits but the focus now turns to whether an increase is appropriate rather than whether the current dividend is sustainable.
Several items were a "positive surprise" to Morgan Stanley amid mobile revenue and earnings growth for the first time in 4-5 years. These include FY22 growth guidance and the share buyback, as well as the continued exploration of options to unlock value in infrastructure.
UBS asserts an inflection point has been reached following several years of pressure from the NBN. The broker is comfortable that guidance can be underpinned by cost savings, mobile revenue growth (a large part of which will be post-paid growth), a rebound in network application/services income and around $30m of extra recurring NBN income.
The announcement of a $1.35bn on-market buyback was consistent with the company's promise as part of the sale of the towers segment in June.
The highlight for Morgans in FY21 was mobile services revenue and the fact that for the first time in years Telstra delivered a "good, clean result". Underlying operating earnings (EBITDA) of $6.7bn was down -9.6%, yet in line with broker forecasts and above the lower end of prior guidance.
Management remains pleased with the amount of cost reductions and the strong performance of mobiles, noting a diminishing financial impact from the rolling out of the NBN.
Underlying FY22 operating earnings guidance is $7.0-7.3bn, which at the mid point of the range is up 6.7%. This has not allowed for any additional customer support relating to the pandemic, although the company is not expecting FY22 will shape up the same way FY20-21 was affected.
Guidance does not assume a reversal of the $380m in pandemic-related headwinds contained within the FY21 base, UBS reflects, while it assumes a degree of normalisation in FY23.
The company believes the path has been cleared for $7.5-8.5bn in underlying operating earnings and a return on investment of around 8% by FY23. This includes around $50m in non-cash accounting from in-sourcing Telstra-branded retail stores.
FY23 guidance also includes no return to international roaming and Credit Suisse suggests any reversal of these items in FY23 would mean that only limited organic growth would be required to reach the lower end of earnings aspirations.
Macquarie sounds a note of caution regarding Telstra's ambition to reach a mid-teens NBN re-seller earnings margin in FY23, as this requires a number of things to go right, including consumers taking out higher plans, add-ons and cost benefits from digitisation.
Still, the company has exceeded its target for recruiting new capabilities in areas such as software engineering, data analytics, cyber security and artificial intelligence, hiring an additional 1500 personnel.
Telstra is in the process of creating three separate legal entities comprising fixed infrastructure (NBN, fibre & property), towers and the service company. Ord Minnett notes, after the recent sale of the towers, the next monetisation opportunity is fixed line infrastructure.