Australia | Sep 20 2021
This story features TELSTRA CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: TLS
Telstra is increasingly confident about a return to growth and key to the outlook is the revamping of its long-held dividend policy
-T25 strategy underpinned by mobile revenue growth and 5G leadership
-Management indicates cash flow to be returned should M&A not materialise
-Energy retailing considered the next step in Telstra's expansion
By Eva Brocklehurst
The next four years are expected to return growth to Telstra Corp ((TLS)) as the NBN roll-out recedes into the background. Brokers welcomed the increased confidence, as the company revamps its long-held dividend policy.
The new guidance is in line with Morgan Stanley's expectations, centred on the operating earnings (EBITDA) forecast for mid single-digit growth in FY25. The broker points out, Telstra's earnings peaked in FY16 and subsequently fell away with the roll-out of the NBN. Hence the return to growth from FY22 is important.
The main underpinnings of Telstra's ambitions include its 5G leadership and the usage of 5G. Yet Macquarie asserts the benefits of 5G on mobile revenue are up for debate although the company's aspirations are a positive.
Telstra's "T25" strategy also aims for compound growth in the high teens for earnings per share (EPS) and Morgans calculates EPS of $0.17 by FY25. This is underpinned by mobile revenue growth. An additional -$500m reduction in fixed costs is anticipated and mobile prices are now heading higher while special dividends from NBN one-offs are expected to cease at the end of FY22.
Telstra is banking on a benefit from the return of international roaming to mobile. Yet this implies 2.8% post-paid ARPU (average revenue per unit) in isolation, which Macquarie flags is well above its forecasts.
UBS assumes Telstra can grow its postpaid mobile ARPU to $52 by FY25, from $47 in FY21, through a combination of postpaid price increases and via the return of roaming revenue. The broker also assesses Telstra can add an incremental 550,000 postpaid customers by FY25 but assumes limited upside from new 5G usage and continued pressure on mobile broadband revenue.
A substantial portion of Telstra's aspirations are based on assumptions that industry pricing remains rational and telcos can charge more for services that add value. Yet, while this is the case in the short term, Morgans warns it cannot be guaranteed.
Telstra believes its current $0.16 dividend is sustainable and now envisages scope for this to lift over time. Management has signalled plans to return any excess cash flow to shareholders should M&A opportunities not materialise.
As franking credits are low, Ord Minnett suggests this is likely to be unfranked special dividends or further on-market share buybacks. Goldman Sachs expects buybacks will be prioritised because of a focus on growing franked dividends.
Credit Suisse welcomes the new capital management policy yet does not expect dividends will grow until FY24 when EPS is forecast to be well above $0.16. The broker also finds no "holes" in the earnings outlook and now expects FY21-25 compound growth of 5.1% in underlying EBITDA and 19.6% in underlying EPS.
UBS calculates $2.4bn in net profit by FY25 is achievable which would imply EPS of $0.199 per security, increasing its mid-term dividend forecasts to $0.18. Additionally, there could be upside if Telstra can generate sufficient franking credits.
Telstra continues to make a range of utility services available to customers, setting a target to be the fifth-largest energy retailer by FY25. Ord Minnett estimates this will represent 5% in market share or $200m in annual pre-tax earnings.
Still, growth in energy retailing via organic means will take time and even achieving 5% market share will be immaterial to the overall business. Again, Macquarie is cautious about this aspect, given the examples of telcos engaged in energy retailing are limited.
Credit Suisse calculates, for Telstra to become a top five player in energy retailing, it would have to penetrate 500-700,000 households, targeting its 8.6m postpaid mobile and 3.6m broadband subscribers.
An obvious candidate for M&A, in Ord Minnett's opinion, is AGL Energy's ((AGL)) eventual spin-off, AGL Australia. The broker envisages substantial synergies between the two businesses and this could place AGL Australia in markets where it has limited presence, such as Western Australia.
Goldman Sachs believes M&A of up to $500m is likely and notes Telstra's health division is expected to be a $500m revenue business by FY25. Fixed infrastructure earnings are expected to grow in the low single digits with $600m in capital expenditure to be undertaken and 6000 km of new fibre built.
The corporate restructure is expected by early this 2022 and more details are expected in the briefing in November regarding building scale in new markets. Goldman Sachs, not one of the seven stockbrokers monitored daily on FNArena's database, has a Buy rating on Telstra with a $4.40 target.
The database has four Buy ratings and one Hold (UBS). The consensus target is $4.38, suggesting 11.7% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.1%.
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