Telco

Telstra ‘nation builds’ to the tune of $1.6bn

Wed 02 Feb 22, 2:53pm (AEST)
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Key Points

  • Regardless of strong share price performance, Ord Minnett retains a Buy rating
  • Telstra reports on 17 February, has confirmed no change to its guidance
  • Following strong share price performance, Goldman's downgraded Telstra to Neutral

Telstra’s (ASX: TLS) share price was up 1.14% this morning following revelations the telco plans to invest between $1.4bn to $1.6bn over the next five years in two major telecommunications infrastructure projects.

While today’s note is clearly price sensitive, management were quick to advise the market that these two infrastructure projects also support the nation’s digital economy and enable more connectivity across Australia.

Two nation-building projects

Project one includes a 16.5-year contract to build and manage the ground infrastructure and fibre network in Australia for Viasat’s ViaSat-3 terabit-class global satellite system.

To the uninitiated, Viasat is a global telco that supplies in-flight Wi-Fi to Qantas. It’s understood project one will bring connectivity to “multiple redundant data centres” by co-locating existing Viasat satellite access node (SAN) equipment across Australia.

Then there’s a new fibre project that will add up to 20,000 kilometres of new route inter-city dual fibre paths to increase the capacity of Telstra’s optical fibre network.

The end result is expected to be faster network connectivity between Australia’s capitals and regional areas.

Cash flow impact

Around 70% of the $1.4bn to $1.6bn Telstra has earmarked for these two projects is expected to be invested across the telco’s T25 planning period. This equates to an additional $350m of capital expenditure annually over FY23 to FY25.

Investors should note that expenditure for these two projects is outside of Telstra’s Business As Ususal (BAU) capex envelope.

However, Telstra’s CEO Andy Penn expects cash flow to remain “ahead of accounting earnings”, with capex including the investment estimated to be “$250m per annum lower than adjusted depreciation and amortisation”.

“Investing in these two truly significant nation-building projects will see us continue to have the largest intercity fibre network in the country, helping to future proof Australia’s digital economy and further improving connectivity in regional Australia,” said Penn.

“This is a multi-year build and will commence at scale late this financial year, and early trial and test deployments are already underway.”

No added guidance

Telstra, which reports its interim result on 17 February, has confirmed there is no change to its guidance for the current financial year.

However, management notes that previously advised plans to complete its on-market buyback this year are on track.

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Telstra's share price has moved steadily higher over the past 12 months

What brokers think

  • Following strong share price performance in 2021, which now sees the telco trading at a premium to global peers, Goldman Sachs (24/01/22) downgraded Telstra to Neutral, and has a target price of $4.40.

  • Regardless of strong share price performance, Ord Minnett retains its Buy rating, and lifts its price target to $4.85 from $4.60. The broker expects to see further upside from the monetisation of assets -think InfraCo- and capital inflows from asset sales – which could well complement good free cashflow in providing scope for further distributions to shareholders. However, these comments (12/1/22) pre-date today’s announcement.

  • UBS retains a Neutral rating and $4 target price (01/12/21) and notes the -$615m Telstra paid for 2x10 MHz of 850/900 MHz spectrum met the broker’s expectations.

Consensus on Telstra is Moderate Buy.

Based on Morningstar’s fair value of $3.92, the telco looks fairly valued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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