Accelerating Change

Telstra updated its guidance around restructuring costs and asset impairment in light of good progress made on its T22 strategy. We have adjusted our earnings forecasts and downgraded our recommendation to Hold from Accumulate, based on valuation, with an unchanged $3.55 target price.

 

We note the following key points from the announcement:

 

  • Management now expects $800m of restructuring costs to be incurred in FY19, up from $600m previously.
  • It also guided to $350m of restructuring costs remaining post FY19, which is a new guide.
  • Telstra plans to write down the carrying value of its legacy IT systems by $500m as they are retired as part of the T22 strategy.

Our FY19 revenue and operating earnings (EBITDA) estimates on a guidance basis remain unchanged at $27.562bn and $9.236bn, respectively, while on a reported basis our EBITDA forecast declines 8.2% to $7.846bn due to the extra $200m of restructuring charges and $500m of asset impairment. Our reported net profit and EPS forecasts have fallen 19.6% to $2.016bn and 16.9c, respectively.

 

Our FY20 revenue and EBITDA estimates on a guidance basis remain unchanged at $27.289bn and $9.483bn, respectively, while our EBITDA forecast on a reported basis has increased 0.5% to $9.233bn due to lower restructuring costs – we now model $250m versus $300m previously. Our reported net profit and EPS estimates have lifted 2.1% to $3.149bn and 26.3c, respectively, as a result of lower depreciation expense.

 

We expect Telstra’s dominance in the Australian telecom market to continue, although recent structural changes to the industry as a result of the rollout of the NBN are pressuring margins. We see a number of potential positive drivers, including the absence of a new mobile entrant, a more benign competitive environment, the prospect of further interest rate cuts by the RBA, potential changes in industry structure (in both mobile and fixed markets), and the rollout of 5G technology. Telstra’s strong share price gains in the calendar year to date leave it fully valued, however, leading us to move to a Hold recommendation.

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