The ascension of Vicki Brady to the CEO role coincides with a rising dividend, strong mobile growth, and further monetisation of infrastructure fixed assets. It also happens to see the end of the NBN rollout which was a heavy headwind to earnings for several years.
Telstra is now essentially a mobile telco. It has invested over $11 billion in its mobile network over the last 7 years, including $4 billion in regional Australia. That investment has helped to extend its 5G coverage to 80% of the Australian population. TLS’s 5G network is twice the size of Optus’s network.
The 8.4% increase in FY22 underlying EBITDA was almost entirely attributable to the 21.2% increase in mobile EBITDA. That growth figured prominently in the 48.5% increase in underlying EPS to 14.4cps for FY22.
Mobile service revenue is expected to increase at mid-single digit CAGR and is a key driver of mobile earnings. Postpaid ARPU increased 2.9% in FY22 with momentum gaining in 2H22. CPI increases will become more apparent as nearly two-thirds of mobile customers will discover in September. The price rises announced in June could add up to $160 million in EBITDA in a full year although some customers will opt for cheaper plans or a different provider. Subscriber numbers are still heading upwards with a net 155k postpaids added this year.
TLS’s Consumer and Small Business segment has bottomed, according to the company, but the NBN market remains highly competitive. TLS wryly noted that its 5G Home Wireless business is currently small but could scale up in FY23f.
InfraCo Fixed rebounded strongly in 2H22 due to $116 million of revenue from legacy network asset sales (copper). TLS expects similar sales over the next few years as InfraCo continues to decommission the legacy network. The new long distance fibre network (adding 20,000km of inter-city fibre with transmission rates up to 650Gbps) that is about to be constructed, with Microsoft as a key customer, will see a change in the nature of capacity sales that may lower EBITDA growth slightly.
The T22 Strategy introduced by outgoing CEO Andy Penn, has pulled out $2.7 billion in underlying fixed costs since 2016, including an 8,000 net reduction in headcount. Reflecting the transition of the company to a more technology-focused business, more than 1,500 new people have been hired in software engineering, data analytics, cyber security, and artificial intelligence While T22 was more about pruning and planting, the T25 Strategy will be more about fertilising and harvesting.
The full year dividend was increased to 16.5cps fully franked with further increases likely to come. The balance sheet is robust and although capex will be slightly raised in FY23f, the momentum in operating earnings due to mobile strength is supporting operating cashflow.
Investment view
As Andy Penn hands the CEO baton to Vicki Brady, there has been some critical commentary about Mr Penn’s tenure that we think is being disingenuous. Yes, the share price was $6.24 on 1 May 2015 when he assumed the role and the ASX200 was 5,888 (now 7,056). But this simple comparison ignores the fact that the NBN rollout was in full swing, COVID-19 was just around the corner and the 5G transition required plenty of capex and a new set of people capabilities. We think Mr Penn has been a good custodian for the company even if shareholders have seen little value in that time.
The cards Vicki Brady is holding appear much stronger than what Andy Penn inherited. The mobile business is benefitting from a less combative environment and the fixed line business is almost shorn of the NBN headwinds. A leaner organisation with more appropriate skills should be able to generate some reasonable earnings growth that will justify the Board’s decision to lift the dividend. Underlying EBITDA for FY23f is now guided to $7.8-8.0 billion and the T25 ambition (not guidance) is for mid-single digit CAGR to FY25.
The rollout of Kevin Rudd’s ‘get Telstra’ back-of-the-envelope NBN was described by Andy Penn as “a large and difficult pill to swallow”. It ultimately dented TLS’s underlying EBITDA to the tune of $3.6 billion per annum but is finally (almost) behind the company in terms of the rollout. High wholesale broadband access charges have plagued the industry and spawned the introduction of 5G Home Wireless services that can bypass the NBN. TLS’s NBN-alternative is small beer at the moment, but the company wryly noted it could scale up quickly.
TLS sold 49% of its Towers business earlier this year and returned $1.35 billion via a buyback. We hope to see further monetisation of infrastructure fixed assets in FY23f which would be another catalyst for the share price.
Risks to investment view
The main earnings risk is if there is an economic slowdown that retards growth in telecommunications spending, particularly mobile. Government regulation in the sector is benign for now but can be a factor if it changes.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 RESULT
FIGURE 2: MOBILE EARNINGS
FIGURE 3: MOBILE CUSTOMERS AND ARPU
FIGURE 4: MOBILE DOMINATES EBITDA AND REVENUE
