Finally, A New Growth Phase For Telstra?

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

It's been a while, but most stockbroking analysts are prepared to take a positive view on Telstra's outlook for the next three years, with asset sales, share buybacks and higher dividends on the agenda.

-Telstra increases final dividend to 8.5cps; first rise in seven years
-FY22 revenue shrunk -4.7% to $22.05bn
-Analysts note a more upbeat sentiment overall
-Mobile competition remains a key risk moving ahead

By Nicki Bourlioufas

Mobile competition a key area of risk

Brokers have welcomed the surprisingly upbeat sentiment that surrounded the FY22 financial result from Telstra ((TLS)), including positive momentum from the mobile division and a surprise increase in dividends, with some analysts saying Australia's largest telco is enjoying its strongest prospects for growth in a decade.

For the 12 months ended 30 June, Telstra’s revenue fell -4.7% to $22.05bn, but this was largely due to costs related to the NBN rollout, which is now nearly complete. On a more positive note, the company’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 8.4% to $7.26bn.

Telstra also provided FY23 underlying EBITDA guidance (excluded the recently acquired Digicel) of $7.8bn to $8.0bn. Guidance includes for total income of $23.0bn to $25.0bn in FY23, exceeding expectations, and reflecting an expected 20% lift in handset sales.

Combined with the acquisition of Digicel (adding $0.3bn), Macquarie indicates Telstra should have released an underlying EBITDA guidance for FY23 of $7.8bn to $8.3bn, with the broker questioning the -$300m shortfall at the upper end.

This is one reason why Macquarie is Neutral on Telstra with a $4.01 price target. The broker points out greater mobile competition is a key risk for Telstra, though upward mobile market pricing should act as a favourable tailwind for the company.

For the moment, Telstra’s mobile business is driving strong revenue gains, with the division posting EBITDA growth of 21.2% or $700m in FY22. Telstra’s 5G network is around twice the size of the next nearest competitor, covering 80% of the population with 3.5m 5G capable devices already connected.

Telstra revealed underlying fixed costs were down -$454m and total operating expenses fell -5.8% to $906m. On management's timetable, 6G could be available by the end of this decade. Telstra’s revenue from the NBN rose 3.3% to $930m, with the revenue indexed to CPI inflation for the next 25 years.

Long awaited dividend rise welcomed

The surprise from the FY22 report came in the form of an increase in the final dividend to 8.5cps, bringing the total dividend for the year to 16.5cps per share.

The FY22 dividend included an increase in the ordinary dividend from 10c to 13.5cps, and will see around $1.9bn returned to shareholders, on top of the successful $1.35bn share buyback completed in May this year.

Commenting on the company’s decision to increase the dividend, outgoing chief executive officer Andy Penn said it represents the first increase in the total dividend since 2015 “and recognises the confidence of the Board following the success of our T22 strategy, the ambition in our T25 strategy of high-teens EPS growth from FY21 – FY25, the strength of our balance sheet.”

As per always, Telstra's dividend outlook is keeping the expert community divided.

Macquarie suggests the increase sets the benchmark for the annual dividend at 17.0cps (8.5 per half) until FY25. Credit Suisse is more upbeat and says the dividend can grow from these levels to 17.0cps in FY23 and up to 18.0cps in FY24.

Goldman Sachs has left its FY24 dividend forecast unchanged at 17cps to 18cps but raised its FY25 estimate 1cps to 20cps. This broker is Neutral on Telstra with a $4.40 price target.

Like Goldman Sachs, UBS has a Neutral rating on Telstra with a $4.15 price target. UBS expects a 17cps dividend in FY23 and observes Telstra shares are only offering a circa 4% FY23 dividend yield on 17cps, below the S&P/ASX200 at 4.6% and representing only a small premium to the Australian government 10-year bond yield of around 3.29%.

More upside potential

Morgans liked the result and has retained its Add rating for the shares. This broker concludes the company is presently enjoying “the strongest tailwinds in a decade” with pricing rises.

Morgans has lifted its target price to $4.60, concluding, after years of working hard to lower costs to offset declining earnings, “Telstra has comfortably turned the corner and guided to growth in underlying EBITDA again in FY23.”

Morgans said the incoming chief executive officer to replace the outgoing Andy Penn is unlikely to change the positive direction of the business.

Morgan Stanley too is very upbeat and predicts Telstra might turn into an outperformer in uncertain markets. The investment bank has a $4.60 price target on the stock with an Overweight rating. Increased mobile market share, higher mobile earnings margins and a big lift in broadband margins from introduction of 5GFW are all considered favourable tailwinds.

JP Morgan also expects more positives to come from Telstra's mobile division in FY23. The mobile division reported underlying EBITDA of $7.3bn in FY22, 8% higher than the prior year.

JP Morgan does point out, while the mobile division performed strongly, the fixed line business remains challenging with the fixed consumer division again reporting “anaemic margins”. JP Morgan has a $4.60 price target on Telstra and an Overweight rating. It estimates dividends of 16.5cps to 17.5cps in FY23.

Ord Minnett, who largely whitelabels JP Morgan research, has maintained its Buy recommendation on Telstra, though it has trimmed its target price to $4.60 from $4.65 due to higher capital expenditure estimates.

Ord Minnett explains its positive angle as follows: “We believe investors should be owning the stock for the mobile outlook and the monetisation of InfraCo".

Credit Suisse, with a target price of $4.50 and Outperform rating, agrees with Ord Minnett's approach, but also believes any increase in mobile competition remains the key risk for Telstra.

FNArena's consensus price target of $4.37 suggests Telstra shares still have more than 7% upside potential.

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