Ord Minnett Research Recommendation: Telstra (ASX: TLS)
Telstra Corporation has guided to strong operating earnings (EBITDA) growth in the medium term driven by higher profitability in mobile and productivity gains in the fixed business.
We also see potential for the further monetisation of assets through the much larger InfraCo business, which we value at 22x or $32bn (on a 100% basis and prior to capital gains tax). Capital inflows from asset sales and good free cash flow could provide scope for further distributions.
Mobile – The mobile segment is Telstra’s biggest contributor and the key driver to achieve achieving the company’s EBITDA target of $7.5–8.0bn by FY23. We forecast further growth in average revenue per unit (ARPU) due to: 1) 12-month credits rolling off September 2020 price rises; 2) a return of roaming revenue; and 3) transacting minimum monthly commitment rises to flow through to ARPU increases. With the best 5G infrastructure, Telstra will continue to gain market share in the post-paid market, in our view, particularly in the initial stages of the technology rollout. Telstra should also benefit from increased international travel, with population the key driver of industry growth.
Productivity benefits – Telstra has delivered $2.3bn in productivity gains since the inception of the T22 program. Further cost savings are expected to amount to an additional $930m over the next four years, with $430m due in FY22 alone. We expect a large proportion of the cost reduction to come in the fixed consumer and small business (C&SB) product in the form of the decommissioning of legacy infrastructure and automation. Management is targeting mid-teen margins in this business, versus 6% in FY21.
Infrastructure sales – Following the 2021 sale of Amplitel at a 28x enterprise value to EBITDA multiple, the next monetisation opportunity is InfraCo Fixed. In the first full year of operation as a separate entity, the business generated $1.5bn in EBITDA. We estimate InfraCo will attract a 22x multiple at a weighted average cost of capital of 4.8% implied from the Amplitel sale. The next key step in the InfraCo monetisation is the scheme of arrangement of the restructure, which needs court and shareholder approvals. This is due early in the calendar year.
Despite its strong performance in recent months – the share price has risen 8% in three months versus S&P/ASX 200 Index, which is up 2% – we maintain our Buy recommendation. Our target price has increased to $4.85 from $4.60 having rolled our model forward to December 2022.
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.