Aim High

Ord Minnett has revisited its sum-of-the-parts (SOTP) valuation for Telstra given the financial details provided on InfraCo, and the recent decision by management to move the company's mobile tower and fibre backhaul assets into InfraCo from 1 July, setting up potential monetisation opportunities.

 

We estimate InfraCo could be worth $30–37bn as a standalone entity, without having to merge with the NBN, while TowerCo could be worth $6bn and FibreCo another $4bn. Including RetailCo, our updated SOTP valuation suggests Telstra could have an enterprise value of $75bn, or an equity value of $59bn. This represents more than 50% potential equity upside from current levels.

 

Unlike Telstra’s current dividend policy, which prevents it from paying dividends out of earnings, we expect InfraCo to pay dividends out of available free cash flow (FCF). Assuming less than 25% capital intensity, and it pays out 80% of available FCF, InfraCo could trade with a dividend yield of more than 4.0%. This would place it between peer Netlink Trust’s 5.1% yield and Chorus’s 3.4% yield.

 

It will likely be another 12–18 months before any discussions around privatisation of the National Broadband Network (NBN) come to the fore, and the economic recovery ahead is uncertain, although we note Telstra’s recent underperformance.

 

Separately, Telstra increased prices on its postpaid plans by $5 across the board with the exception of the top-tier plan, which rose by $15. In exchange, data inclusion increased by 20GB except for the lowest-tier plan, which rose by 10GB (the lowest-tier plan already benefited from a 15GB increase in data inclusion in April), and the highest-tier plan, which rose by 30GB.

 

We consider this a bold move by Telstra at a time when the industry is expecting Vodafone to be more aggressive on pricing following its merger with TPG Telecom (TPG, Accumulate), although we believe the move is the right one given the current industry dynamics in terms of competition and 5G investments.

 

We expect Telstra’s dominance in the Australian mobile, fixed and enterprise telecom market to continue. In the absence of a new mobile entrant and a more benign competitive environment, we find the current valuation attractive, particularly given the expected large free cash flow generation in the coming years and the potential upside from InfraCo.

 

We maintain our Accumulate recommendation on Telstra with a $4.10 target price based on our discounted cash flow valuation.

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