Telstra (ASX: TLS)
Telstra shares have been strong gainers year-to-date, extending gains from 2022 thanks to several factors, spearheaded by positive financial traction and the increase in dividends. In our view, there is significant optionality for the monetisation of the InfraCo business, although we may have to wait until late 2023 or beyond for a decision here.
With mobile price increases on the way and all the signs of a more rational pricing market in mobile enabling Telstra to leverage the company’s leading position, we retain our positive stance and buy rating on Telstra for Members with no exposure. We suggest patience and buying on the dips given the solid gains YTD and the (justified) premium price-to-earnings multiple.
Telecommunications has become an essential service and thus should be resilient during a downturn. Meanwhile, there is secular growth in data usage and Telstra has opportunities to grow revenue in newer areas like IoT as we increasingly move to a digital world.
Telstra enjoys a leading position in the oligopolistic Australian telecoms market given the heavy investment in its network. At the time of the interim report, Telstra’s 5G network covered 81% of the population and was on track to hit 85% by mid-2023.
After years of bearing the brunt of the financial hole from the NBN and price wars in mobile, the environment is sunnier for Telstra. The annuity cash flow from the infrastructure leasing deal (i.e., ducts, pits, exchanges) with NBN is indexed to inflation. Meanwhile, Telstra has dramatically simplified its mobile plans (cutting costs) and pushed through price increases, which combined with higher customer numbers has lifted the financial performance for the key mobile segment.
To recap, in 1H23 mobile showed continuing growth, with revenue up more than 9%, supported by higher average revenue per user (ARPU) and subscriptions. Post-paid handheld ARPU was up by 4.5% to $50.47 per month, a welcome development. Combined with more subscriptions, mobile earnings grew by 13.6% to $2.2 billion to be a highlight within the group results.
Even higher ARPU is on the horizon as Tesla earlier announced a higher-than-expected 7% increase in post-paid mobile and mobile broadband prices to arrive in early July. That is going to equate to about $3 – $6 dollars depending on your plan. That followed an earlier announcement that pre-paid costs would be lifted by up to a hefty 20% in some cases. More will likely be on the way in the future, as consumers have become used to price rises. In addition, the recent results and commentary from Optus owner Singtel suggest that the more rational pricing environment has legs. Meanwhile, the return of roaming is positive, as is the flow of immigrants back to Australian shores.
Turning to the charts and TLS shares have been on a robust uptrend since September 2022. The uptrend was also confirmed by a ‘golden cross’ – where the 50-day (red) moving average crossed above the 200-day (green) moving average (shown above) More recent price action, however, shows momentum is slowing down with the share price failing to breach above the 4.40 levels and recent price has inched closer to the 50-day MA. At this point, keep a close eye on TLS to see whether the 4.30 level and 50-day MA will hold.
The solid performance of the core mobile business helped offset the lacklustre performances of some other areas like Enterprise. International revenue was another highlight though, thanks to the Digicel Pacific acquisition last year. As members may recall, group EBITDA rose 11.4% to $3.8 billion and NPAT surged 25.7% to $934 million.
The key win for many was the nudge upwards in the fully franked interim dividend to 8.5 cents per share from 8.0 cents.
Excellent cost discipline has been supportive. Will Telstra return to steady growth in dividends? While only time will tell, we are encouraged by the more rational pricing environment and continued excellent operational execution with material progress in the T25 strategy. These are supportive of a return to modest dividend growth, although we would caution about expecting too much on this front. Nonetheless, we view Telstra as a core position and see significant optionality in the monetisation of InfraCo.
We retain our buy rating for Telstra for Members with no exposure. We recommend being patient and buying on dips.
Disclosure: Interests associated with Fat Prophets hold shares in Telstra.