Telstra’s (ASX: TLS) upbeat first-half result has been overshadowed by the tightening of its full-year earnings guidance, reflecting the disappointing performance of its Network Applications & Services (NAS) division.
The first-half result was largely in line with analyst expectations, boosted by strong earnings growth across mobile, consumer and infrastructure services but partially offset by a decline across its enterprise division. The stock is down around 1.3%, as of writing.
To understand more about Telstra’s moving pieces, we spoke to Michael Maughan from Tyndall Asset Management, who still believes Telstra offers the best defensive exposure on the market.
The below numbers refer to first-half FY24 results and comparisons against the prior period.
Revenue +1.1% to $11.4 billion
EBITDA +3.8% to $4.0 billion
Net profit after tax +11.5% to $1 billion
Underlying ROIC +0.3% to 7.8%
Earnings per share +12% to 8.4 cents/share
Interim dividend +5.9% to 9 cents/share
Full-year guidance
Narrowed adjusted EBITDA guidance to $8.2 billion to $8.3 billion from prior guidance of $8.2 billion to $8.4 billion
Revenue guidance of $22.8 billion to $24.8 billion
CAPEX guidance of $3.6 billion to $3.7 billion
Mobile profits have delivered, but Network Applications and Services (NAS) profits have completely evaporated, leading to a 2% EPS downgrade.
The market was aware that Enterprise was under pressure, but NAS only generated $17 million in EBITDA, whereas the market was anticipating approximately $100 million.
On a positive note, the mobile sector is thriving with increased subscribers and a 5.4% growth in APRU (average revenue per user). This is the primary driver expected to fuel earnings and dividend growth over the next few years.
Rating: BUY
It offers the best defensive exposure in the market due to its pricing power in an industry where demand for the core product, data, continues to grow.
In comparison to other defensives, the risks from inflation are lower because people constitute a much smaller part of the cost base, unlike in the retail sector.
The outlook appears positive due to the ongoing demand for data and the focus of all mobile players on improving returns after substantial investments in 5G.
The risks for telcos include irrational competition, technology, and regulation, but currently, these risks are relatively benign.
One aspect the market isn’t on top of is Telstra's investment of $1.6 billion in fibre projects, which won't generate revenue until FY26. Even then, the capacity in these "pipes" will be gradually sold over decades. This value is likely underestimated when considering today’s earnings.
Rating: 3
We're adopting a cautious approach and concentrating on stock selection. Our straightforward perspective is that market multiples are currently above historical averages, and we don't perceive sufficient earnings growth to warrant further increases.
This article first appeared on Livewire Markets.
Read Announcement - Telstra half year results show continued growth
View Presentation - Financial Results 1HY24 presentation materials
Don't miss an ASX announcement this reporting season, set up and receive announcements direct to your inbox on Market Index: Create Alert Now
Get the latest news and insights direct to your inbox