Telstra’s big engine is the mobile division, now representing over half the group’s underlying operating earnings. The market does not appear to appreciate the strength of this business that, with all the benefits of 5G available, will drive an impressive earnings growth profile for several years.
Mobile service revenue increased 6% in 1H22, accompanied by a 25% lift in EBITDA to $1,957 million. Postpaid ARPU (average revenue per user) kicked in 5% growth and net subscriber growth threw in a handy increase of 84k. TLS’s very strong position in 5G, with its superior network coverage, is the basis for the growth. At $2,500 million, postpaid revenue is 70% of total mobile retail services.
Prepaid and mobile broadband also returned to growth and the re-opening of Australia’s international border will see the return of mobile roaming revenue soon enough.
Most of TLS’s mass market customers are now on in-market plans which will make it far simpler to implement inflationary price increases.
A key element to the mobile story is the genuine improvement in margin. 1H22 mobile EBITDA margin reached 41.8%, a big step up from last year’s 33.2% and a clear shift from the steady decline in recent years as shown in Figure 2. Maintaining a steady cost base is helping this trend.
When mobile ARPU, subscribers and operating margin are all heading north, as they are now, this is good news for group earnings.
TLS’s FY22 group EBITDA guidance range is unchanged at $7.0-7.3 billion and FY23 EBITDA ‘ambition’ (not guidance) is $7.5-8.0 billion, excluding about $300 million from the recent Digicel acquisition.
Reported net profit for the half year was down 2.4% to $1,737 million in part due to lower NBN one-off receipts (as the NBN network build nears completion) and some restructuring and Amplitel transaction costs.
Investment view
We see EPS growth close to 20% pa through to FY25f, well ahead of consensus forecasts, and with the dividend yield heading towards 4.9%, TLS looks cheap. Adjusting for sustainable capex ~$600 million below depreciation and amortisation, the PE ratio is around 17x FY23f instead of the headline 23x.
There are more assets that can be monetised and although the next transaction might not be until CY23, this provides another catalyst for the share price.
The dominant mobile business is performing very well and will more than offset the natural decline in parts of the Fixed businesses.
TLS declared an unchanged interim dividend of 8cps (6cps dividend plus 2cps special), but we can see the full year dividend increasing in FY23f ahead of consensus forecasts.
At the end of 1H22, TLS had repurchased $571 million of its $1.35 billion share buyback, which is returning about half of the net $2.8 billion proceeds received from the sale of 49% in Amplitel.
Net debt is currently $2.1 billion and comfortably within the company’s credit metrics.
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.
