Winning in mobile
Australian telecommunications titan Telstra’s statutory profits performance in its recently reported interim results may have looked disappointing but the underlying earnings picture told a different story, underpinned by a winning performance in mobile. Importantly, Telstra held the line on dividends and reaffirmed full-year guidance.
This week Telstra (ASX:TLS) announced a surprise tie-up with competitor TPG, forming a ten-year regional Multi-Operator Core Network (MOCN) commercial agreement. On Telstra’s side it gets access to the low and mid-band spectrum that TPG holds, monetizes its assets and remains the dominant telco with the broadest coverage in Australia due to its mobile coverage in areas where no other operators have invested. The coverage it will share with TPG is already contested with Optus.
Telstra (ASX:TLS) estimates that the deal will deliver between $1.6 billion and $1.8 billion of revenue for it over the initial ten-year term.
CEO Andrew Penn said the deal was a continuation of Telstra’s strategy to maximise the utilisation and monetisation of its assets and, “This additional spectrum will mean that all Telstra customers will continue to experience Australia’s best and fastest network across the country, in combined 4G and 5G speeds. In particular, the spectrum agreement will ensure that regional and rural customers will now experience faster speeds in more locations on their mobiles.”
Regional networks have become more congested as city folk have shifted to remote working in more rural areas and users generally are consuming much more data. Forming the deal with TPG to get access to spectrum will be more efficient than having to build more mobile towers and radio antennas for Telstra to cater to the surging data demand.
The deal is subject to approval from the ACCC, but we don’t expect the ACCC to have a major objection in this case, given infrastructure deals like this are common in the telco industry. We see both telcos as mutually benefiting from this deal and expect to see more collaborations between competitors in the domestic market this year.
1H22 key takeaways
Headline numbers looked soft, with reported fall of 9.4% to $10.9 billion in revenue, EBITDA falling 14.8% to $3.5 billion and attributable (for equity holders) net profit dropping a sharp 36.4% to $689 million for the first half of FY22, while EPS was down 35.9% to 5.9 cents. However, these figures were marred by a series of one-off items, such as sales of its Pitt Street Exchange (leased back), South Brisbane Exchange and Velocity Fibre assets, and declines of around $450 million in one off NBN receipts and around $200 million in NBN commercial works.
Revenue (excluding finance income) from ordinary activities was 4.4% lower at $10.5 billion. Underlying results, which adjust for one-off items and underlying EBITDA increased 5.1% to $3.5 billion, supported by a reduction in operating expenses and a strong performance from the mobile division (critical to Telstra’s future earnings prospects). It was the second half year in a row for an increase in underlying EBITDA. Underlying EPS was up 55% to 6.2 cents. The interim dividend was maintained at 8 cents.
Source: Telstra (ASX:TLS)
Operating expenses fell 6.7% to $7.4 billion and the company said it was on track to reduce underlying fixed costs by about $430 million over the course of FY22. Positively, the Mobile business put in a sterling performance with $392 million, or 25% increase in EBITDA to $1.96 billion. This was even as revenue for the segment inched 0.6% lower to $4.68 billion due to lower hardware income, impacted by supply chain constraints. The reopening of borders will provide a lift for mobile by increasing roaming fees and a return of students etc.
The mobile EBITDA margin improved strongly from 33.2% a year ago to an impressive 41.8% in 1H22. Telstra added a solid 84,000 subscribers in the important (lucrative) post-paid mobile services area, including 62,000 branded. Post-paid average revenue per user (ARPU) was up 5% to $48.29. Post-paid revenue increased 6.3% to $2.5 billion. In a positive sign the lead indicator of ARPU, transacting minimum monthly commitment (TMMC), improved $2 in 1H22 compared with 1H21, boding well for momentum.
Source: Telstra (ASX:TLS)
Meanwhile, prepaid handheld revenue increased by 6.9 per cent to $432 million as unique users increased by 67K over the half. Prepaid ARPU increased 8.7% to from $20.89 to 22.70. We are very encouraged by the increases in ARPU for Telstra after a long period of declines. In prior coverage we had suggested the roll-out of 5G and Telstra’s superior network here could see ARPU finally turn the corner and although one swallow is not a summer, the 1H22 metrics here were a big positive.
Telstra’s strategy to whittle down the complexity and number of plans has been a good move and it has been able to charge a modest premium due to its superior 5G network and frankly, the incumbency element and some inertia from consumers when it comes to changing plans.
Telstra (ASX:TLS) reaffirmed FY22 guidance for underlying EBITDA of $7 billion to $7.3 billion and free cash flow after lease liabilities of $3.5 billion to $3.9 billion. The first half results in both these areas are supportive of Telstra hitting its range, likely at the bottom end.
Summary
Telstra’s headline 1H22 numbers underwhelmed but the underlying performance was much better. Some legacy areas were weak but the key driver, Mobile, put in a strong performance. 5G is only going to see demand for data grow and with the coming future growth of the “internet of things,” Telstra has opportunities to grow. It was encouraging to see the pick-up in ARPU in mobile.
Overall, the half provides us with relative confidence that the new, more upbeat financial targets, along with operational plans and strategic priorities of the T25 strategy are the right course and can largely be achieved.
There is now a clear pathway back to underlying earnings levels that will cover the dividend (strong cash flows provide leeway) over the next few years 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).
