Back to the Growth Path
Shares in Telstra (ASX:TLS) continue its ascent following a solid run following a strong fiscal year result and coupled with a clear path to growth to fiscal 2025. The company has since provided some additional updates that provide more colour on its growth path and we review them in today’s report.
What’s new?
Back in late September (FAT-AUS-1038), we covered Telstra’s unveiling of the new strategy dubbed T25 (i.e. Telstra 2025). If there was one sentence to sum up the new strategy, it would be best captured by CEO Andrew Penn when he said that “if T22 was a strategy of necessity, T25 is a strategy for growth.”
Exciting times, in our view, as this highlights a path to growth and timely one to boot as it provides some direction in a potentially post-COVID environment. Moving on, Telstra’s focus is now on growth and also sustaining ‘value creation’ shareholders which means that through to FY25 Telstra is targeting a mid-single digit underlying EBITDA compound annual growth rate (CAGR) and high teens underlying earnings per share (EPS) CAGR from FY21 to FY25. Telstra is targeting increasing underlying ROIC (return on invested capital) to 8% by FY23.
These growth targets factor in a mix of achievements from keeping market leadership with a high degree of 5G coverage among revenue focused metrics. The key point of focus, is the 5G space which is the next important stage in the mobile phone development. Telstra management is aiming to extend 5G coverage to 95% of the population while capturing 80% of mobile traffic. Management is also looking to expand its Telstra Plus membership to 6 million by FY25. Combined with its superior network, these targets are expected to underpin mobile services revenue growth.
Source: Telstra (ASX:TLS) Investor Presentation
To achieve the EBITDA or ‘bottomline’ growth targets, management is looking at further reducing net fixed costs with a $500 million cost-out target (on top of the $2.7bln target for FY22).
All in all, we remain pleased with management’s strategies and keenly await the upcoming implementation of T25. We are curious, however, of what management has planned for Telstra InfraCo Fixed following its restructuring efforts here. There remains potential to offload its stake in this business given that it has achieved similar success with InfraCo Towers which it sold for a pretty 28x earnings multiple valuation (~$2.8bln price tag). Lopping that off could provide more value in the form of a massive share buyback or special dividend. Time will tell and we intend to keep watch on this front.
Since then, there have been a couple of key updates from (i) renewal of a key contract worth billions and (ii) winning a key low-band auction that could hint at the group’s reach.
On that point, we look at the one announcement that represented over a $1 billion of revenue to Telstra. In a release, Telstra announced an agreement to renew its contract with the Australian Department of Defence (DoD) to deliver critical network and telecommunications services.
The contract is set for another five years, worth over $1 billion, and will see Telstra continue to provide “leading-edge technology and telco solutions”. We find this valuable given that the DoD is its largest ever customer contract of its kind signed by Telstra Enterprise while ensuring that they stay onboard will contributes to Telstra’s goal of moving the business to growth (à la T25).
Following that, and in a release last week, Telstra announced that it was won a key auction in the low-band spectrum space – key for the 5G rollout. According to the release, Telstra has invested $616 million to secure 2x10MHz in the Australian Communications and Media Authority’s 850/900 MHz band auction. Note that the 2x40MHz of low-band spectrum covers major cities and 2x45MHz covers regional and remote areas.
This announcement is a key one as it represents the maximum amount of low band spectrum Telstra was allowed to bid for under the competition limits set by the Government. This also makes Telstra (ASX:TLS) the telco with the largest reach and would be a key factor in the T25 growth plan to provide 95% 5G coverage.
In line with that update, we’re pleased to see Telstra’s 5G network making progress and now covers to more than 4,000 sites across the country, reaching 75% of the population – a solid milestone and not too far off from its ultimate target. We’re pleased to see that Telstra now has an impressive lead over its rivals.
Summary
Telstra (ASX:TLS) appears to be at an inflection point in our view. Management has revealed new, more upbeat financial targets, along with operational plans and strategic priorities through to FY25 that should positively impact the business given adequate execution. The track record under the last strategic plan was on point and we believe the business is poised for renewed growth, improved profitability and a return to higher dividends over that time frame.
Going forward, we see solid runway on Telstra’s 5G networks having captured some 1.6 million devices now on the networks. Ultimately, after a period of intense competition we expect it to increase ARPU (average revenue per user) for Telstra (ASX:TLS). Its leadership in 5G should be extended through the initiatives discussed in the T25 plan, which was well received by the market.
There is now a clear pathway back to underlying earnings levels that will cover the dividend (strong cash flows provide leeway) and headwinds from the NBN will fade further going forward.
We continue to recommend Telstra (ASX:TLS) as a BUY for Members without exposure.
Disclosure: Interests associated with Fat Prophets hold shares in Telstra (ASX:TLS).
