Under Pressure

Telstra Corp posted a weak first-half FY17 result, with operating earnings of $5.189 billion missing Ord Minnett’s forecast of $5.406 billion and the consensus estimate of $5.325 billion. An interim dividend of 15.5 cents per share, fully franked, was declared.


Total revenue of $13.703 billion also fell short of our forecast of $14.254 billion and the consensus estimate of $14.311 billion.


Telstra cut revenue growth guidance for the full year to the lower end of its mid-to-high single-digit range, while operating earnings growth guidance was kept at low-to-high single-digits. Free cash flow guidance of $3.5–4.0 billion was left intact.


Following the result, we have cut our revenue estimate for FY17 to $27.779 billion, implying growth of 2.7% year-on-year (YoY) and below company guidance. Our operating earnings forecast goes to $10.658 billion, implying 1.8% YoY growth, and our free cash flow estimate is $3.530 billion, both of which are at the low end of company guidance. For capital expenditure, we estimate $4.489 billion for FY17, or 17.5% of sales, in line with guidance of 18%.


We expect Telstra’s dominance in the Australian telecommunications market to continue and we acknowledge the stock’s dividend yield is the highest among incumbent telecommunications operators in the world. That said, we see recent and potential structural changes to the industry as likely to pressure growth and profitability in the near term. Thisd led us to cut our recommendation on Telstra to Hold from Accumulate and our target price to $5.35 from $5.45.

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