Sum of the parts

Ord Minnett Research Insight: TLS   

Telstra Corporation provided an update on its proposed corporate legal structure into four subsidiaries. The subsidiaries are to be formed under a new holding company and include InfraCo Fixed (the existing Telstra Corporation), InfraCo Towers, ServeCo and Telstra International (created post the scheme of arrangement).

The proposed legal corporate structure will be the next step in the company’s T22 plan to realise more value from its passive infrastructure assets. The proposal will be put before shareholders for approval at the AGM in October.

Further details of the legal structure are expected by scheme booklet in September. The booklet will include further information for shareholders on the arrangement and the financial consequences such as stamp duty and transfer pricing that will result from allocations between the different parts of the organisation.

Telstra confirmed its previously announced timeline for the realisation of its InfraCo Towers assets to start in early FY22, with binding offers to be received before the end of the year. The proposed legal restructure will provide flexibility and optionality to monetise other parts of the newly established group, that is, InfraCo Fixed and Telstra International. However, there was no announcement of a timeline or plan for the realisation of further assets.

Telstra does not intend to recapitalise its balance sheet from the transaction or deviate from the 2x net debt to operating earnings target. Existing debt is expected to remain in Telstra Corporation (proposed InfraCo Fixed), with the refinancing of debt to be undertaken through Telstra HoldCo (the proposed holding company).

We see Telstra as the best placed operator in the Australian mobile market. The company’s head start on the rollout of 5G infrastructure should see gains in market share of lucrative postpaid subscribers. With the stock trading well below our DCF valuation, we maintain our Buy recommendation with a $4.05 target price.