InfraCo stays

RESULTS ANALYSIS

Need To Know

• Strong mobile EBITDA result anchors ~5% net profit beat. Final dividend 8.5cps.
• TLS to keep InfraCo Fixed business rather than monetise.
• FY24 underlying EBITDA guidance $8.2-8.4bn.

Investment Implications

Result Overview:

Underlying EBITDA $7.9bn, guidance $7.8-8.0bn, consensus $7.9bn

Net profit $1.9bn +14%, consensus $1.8bn

EPS 16.7cps +16% on pcp

DPS 8.5cps (final) as expected.

FY23 result. Underlying EBITDA $7.95bn (+9.6% on pcp) at the top end of guidance ($7.8-8.0bn) and net profit $2.1bn was 5% ahead of consensus. The final dividend of 8.5cps (full year 17cps) in line with payout policy.

On the retention of InfraCo, CEO Vicky Brady said: “we have concluded that the greatest value to be created for shareholders is by maintaining the current ownership of InfraCo Fixed, for at least the medium term.” This business is now a standalone, transparent entity within TLS that can leverage the ‘shift to the cloud and AI adoption’.

TLS is making further investments in inter-city fibre networks and submarine cables to underpin the infrastructure customers will need as digital communication evolves. TLS’s capex budget for FY24 is $2.8-3.2bn.

Mobile revenue grew 8.3% as subscriber numbers and ARPU edged forward across all segments. Postpaid subscribers stepped through 8.8m (net adds +86k) drawing an increased monthly ARPU of $51.15, boosted by the return of roaming, generating ~$5.4bn revenue or just over half of total mobile revenue. The maturing mobile industry is avoiding the previous costly market share wars enabling steady yet meaningful growth in earnings through price increases. TLS also has just over 0.5m subscribers to its budget Belong brand. Another 2.9m subscribers (net adds +247k) access prepaid services at an average $26 per month. TLS also added 298k wholesale subscribers.

The completion of the Digicel Pacific acquisition in July 2022 added $337m to International EBITDA this year.

InfraCo Fixed EBITDA was static at $1,59bn and included $943m from the government for access to the company’s ducts, fibre and fixed network sites (NBN). This is government-backed, recurring and CPI indexed income for the next 24 years of the contract. TLS noted it has over $2bn of long-term contracts signed and as it invests further in projects such as the inter-city fibre, it should see meaningful earnings growth well into the future.

Outlook. Company guidance for FY24 is in-line with market expectations. Underlying EBITDA is guided to $8.2-8.4bn, capex $3.6-3.7bn and free cash flow (after lease payments) $2.8-3.2bn.

Investment View

The decision to retain InfraCo Fixed was a mild surprise though not totally left field. Last year’s sale of the towers business led to a $1.35bn share buyback but TLS has not achieved any further asset sales since. Looking at the counterfactual, the company is ‘excited’ to retain the business for the medium term to develop the potential itself.

The catalyst of further share buybacks may have disappeared but is replaced by the potential earnings growth. Either way, shareholders should still benefit with the only difference now being how the market will value InfraCo inside TLS rather than what it might be worth to an acquirer. We think the share price did not reflect the latter scenario in any case.

The mobile business continues to be the principal driver of earnings, and everything is going very well. The market is stable, rational and the pie is growing for everyone.

The ever-present regulatory prickle bush is nothing new to TLS, so the latest ACCC rejection of the regional infrastructure deal with TPG is unfortunate, but not damaging.

We still prefer TLS in the sector and although the FY24 PER at 21x looks a touch expensive, the 4.5% dividend yield support and increasingly dependable earnings growth keeps our rating at Buy.

Figure 1: TLS Mobile and Group EBITDA