If I had to use one word to describe Telstra’s first half profit result last week it is “workmanlike”. A creditable pass, but no high distinction. Absent any real highlights, but also absent any real lowlights.
The key achievement was that it demonstrated earnings growth with underlying EBITDA up 5.1% to $3,495 million. Sequentially, Telstra achieved earnings growth of $41 million in the second half of FY21 and $130 million in the first half of FY22. For the second half of FY22, it is guiding to further growth of up to $300 million, which would take the full year outcome from $7.0bn to $7.3bn.
Whereas “earnings growth” is a standard expectation for most companies, for a company such as Telstra that went backwards for almost a decade, this is a real achievement. It has come against the backdrop of the NBN, which slashed Telstra’s underlying earnings by about $2.5bn.
Importantly, earnings growth means that the ordinary dividend is now 6c per share (there is also a special dividend of 2c per share, taking the total to 8c per share). Telstra’s capacity to keep paying a total dividend of 8c each half year once NBN “one-off” receipts (the basis for the special dividend) end, has improved.
In a business sense, mobiles was the standout, with Telstra adding 84,000 post-paid retail customers in the half. Average revenue per user (ARPU) increased by 5% from $45.99 to $48.29. Total EBITDA for the division increased by $392 million from $1,565 million to $1,957 million. Further momentum is expected in the second half, with lead indicators on ARPU positive and the potential for international roaming to return.
The main negative was in fixed bundles for consumer and small business, where Telstra lost 50,000 customers in the half year. Telstra says that it is confident of restoring momentum by leveraging the benefit of the home broadband features it offers (the Telstra Smart Modem, Telstra TV, Telstra wifi guarantee etc).
The product area most impacted by the NBN (fixed for consumer and small business), Telstra’s EBITDA margin for the half year declined to just 1.0%. The company says it is “confident that EBITDA has now reached the bottom”, and with NBN migration substantially complete, ARPU momentum, a new digital stack and ongoing productivity, “net margin expansion” should occur. It has, however, deferred its margin ambition for “mid-teens” from FY23 to FY25.
What do the brokers say?
The brokers remain positive on Telstra, with a consensus target price of $4.43, 13.4% higher than Friday’s closing price of $3.91. The range is a low of $4.00 from UBS up to a high of $4.60 from Morgan Stanley. There was little change in targets following the result, with Ord Minnett (JP Morgan) the exception, lowering its target from $4.90 to $4.50. Of the major brokers, there are 4 “buy” recommendations and 1 “neutral” recommendation.
Looking ahead, the brokers have Telstra trading on a multiple of 28.2 times forecast FY22 earnings and 23.4 times forecast FY23 earnings. Each of the brokers forecasts a dividend of 16c per share for FY22 and for FY23.
Bottom line
Telstra is low risk, almost an annuity-style of stock where you can pencil in the 16c fully franked dividend. It is no rock star, but under CEO Andy Penn, it is delivering on its key promise of low single-digit earnings growth.
Telstra – 2/21 to 2/22
Source: nabtrade
As the graph above shows, its share price has been on a steady rise over the last 12 months. It shied away from $4.25, but found good support around the $3.75 to $3.80 level.
Currently yielding just over 4.0%, I expect it to remain a core portfolio stock for investors looking for reliable income but not wanting too much risk on the downside. While Telstra is increasing earnings and cash flow is strong, Telstra foots that bill. Additionally, there is potential upside in the share price from the sale/demerger of the Telstra Infrastructure business (InfraCo Fixed) and/or divestment of Telstra’s 51% interest in Amplitel (Telstra’s mobile towers).
A buy under $4.00. Telstra can go higher.
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