Key points
- Mobile continues to be the star in Telstra’s product suite, with overall revenue growing by 10.2% to $10.6 billion – almost 40% of the company’s total.
- Another tail wind may be Telstra’s creation of its Telstra Health division. Telstra has built capabilities in electronic prescription and dispensing; residential, aged and community care software; hospital information systems; telemedicine; health analytics and other solutions in healthcare.
- For a taxpayer paying tax at 15%, such as an SMSF in accumulation, the forecast dividend yield of 5.23% on Telstra is an effective yield of 6.35%. For a 0% taxpayer, such as an SMSF in pension, this rises to 7.47%.
Hang on to your Telstra – and buy more in dips. That’s the take out from Telstra’s results last week and the market’s subdued reaction. The new boring stock!
For income seekers, boring – high yield, low beta or low market volatility – is good!
Telstra (TLS) – Aug 14 to Aug 15
The results
Telstra marginally beat guidance and analysts’ expectations. Adjusting for the sale of the CSL Hong Kong mobile business in May 2014, Telstra:
• Grew income by 6.6% to $26.3 billion;
• Grew EBITDA by 4.5% to $10.8 billion
• Increased earnings per share by 0.3% to 34.5 cents
• Declared a higher final dividend of 15.5 cents, taking the total year to 30.5 cents, fully franked, up 3.3% on 2014.
Those numbers are solid, but not spectacular, and almost boring.
Tailwinds
Mobile continues to be the star in Telstra’s product suite, with overall revenue growing by 10.2% to $10.6 billion – almost 40% of the company’s total. During the year, Telstra added 664,000 subscriber services, bringing its total subscriber base to 16.7 million. Although Telstra’s rate of growth slowed in the second half to 298,000, this was still more than the combined growth achieved by Optus and Vodafone.
Importantly, first and second half EBITDA margins on mobiles were both 40%, despite a fall in average revenue per unit (ARPU) of $0.63 due to higher data allowances and lower excess data rates.
With Telstra planning to expand its 4G footprint to 99% of the population and build more than 750 new mobile base stations that will bring the overall network to over 9,000, it is clearly the network leader and its strength in mobiles remains a key tailwind.
Telstra’s Network Application and Services (NAS) portfolio grew revenue by 23.2%, a third consecutive year of above 20% revenue growth. Existing and new contracts, as well as acquisitions in the managed network services area (O2 and BridgePoint) fuelled the growth. Although still relatively small, cloud services increased revenue by 33.0% to $286 million.
Telstra expects profitability from the NAS portfolio to improve as it standardises the services, drives operational leverage and reaches critical scale.
Potentially, a third tail wind may be Telstra’s creation of its Telstra Health division. Over the last 18 months, through 15 acquisitions, investments and distribution agreements, Telstra has built capabilities in electronic prescription and dispensing; residential, aged and community care software; hospital information systems; telemedicine; health analytics and other solutions to help patients, providers and health professional to connect more efficiently.
And the NBN might yet prove to be the biggest tailwind.
Headwinds
While Telstra is doing well in mobiles, subscriber growth is slowing and ARPU is falling, as competitors fight to retain market share by offering consumers better deals. Telstra may yet see pressure on its margin of 40%, and be required to invest more aggressively to sustain growth.
Revenue from fixed voice and legacy products continues to fall, although the revenue decline in fixed voice of 7.1% was the lowest in five years. Offsetting fixed voice was an increase in fixed data, with Telstra adding 189,000 fixed broadband subscriptions. Worryingly, growth in the second half was slower than the first half due to increased competition.
Guidance
Telstra has provided the following guidance for FY 16:
- Mid-single digit income growth (FY 15 baseline $26.6 billion)
- Low-single digit EBITDA growth (FY 15 baseline $10.7billion)
- Capex at approximately 15% of sales
- Free cash flow in the range of $4.6 billion to $5.1 billion
Companies are encouraged, but not required to provide earnings guidance. By any standard, this guidance is both definitive and comprehensive, leading support to the view that Telstra is increasingly taking on annuity style characteristics.
Brokers
The brokers are, as group, negative on Telstra. According to FN Arena, five neutrals and three sells (no buys) translates to a sentiment rating of -0.4. The consensus target price of $5.69 sits 6.4% below Friday’s close.
For a taxpayer paying tax at 15%, such as an SMSF in accumulation, the forecast dividend yield of 5.23% translates with franking to an effective yield of 6.35%. For a 0% taxpayer, such as an SMSF in pension, this rises to 7.47%.
Bottom line
While Telstra may find growth a little more challenging going forward, it is not going to fall over and there is a high degree of confidence that its earnings will come in within a few percentage points of its guidance.
It is that classic boring, low volatility stock that is starting to look more like an annuity.
The brokers may be right in their view that Telstra is over-valued. They may also be right that if the market rallies 10%, Telstra will lag and may only rise 5% or 6%. However, for income seekers, Telstra remains an attractive option.
Until there is a meaningful prospect of a rise in interest rates in Australia, Telstra remains a key stock in our income portfolio and a “buy in dips” story. Fans of the 13-month strategy (get three dividends over 13.5 months) should note that Telstra goes ex its 15.5c dividend on Tuesday 25 August (meaning that the last day you can buy Telstra cum dividend is Monday August 24). Telstra has also re-instated its dividend re-investment plan – you can elect to participate in this by advising Telstra up until August 28.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
