Mobile Momentum Drives Telstra

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

Consumers are feeling the pressure of cost of living increases, but momentum in mobile continues for Telstra.

-Subdued handset sales suggests customers are beginning to feel cost of living pressures
-Mobile operating momentum to continue
-InfraCo offers value

By Danielle Austin

As a result of fewer consumers purchasing new mobile handsets, Telstra ((TLS)) has refined its revenue guidance to the lower end of its previous range while retaining headline metrics. With mobile handset sales typically being low to zero margin, brokers largely expect the impact of lower sales to be immaterial. 

Of more interest, according to Morgans (Add, target price $4.70), is that lower sales of mobile handsets suggests consumers are beginning to react to rising cost of living pressures and opting to retain their existing mobile phones for longer. 

Reporting on its first half, the company delivered 6% year-on-year revenue growth and 11% year-on-year earnings growth to $3,895m, beating consensus expectations. The result was underpinned by returning momentum in mobile growth, which could continue into the next fiscal year, and should go some way in offsetting weakness in the Fixed Enterprise business for now. 

The dividend was lifted to 8.5c, as expected by some not all brokers.

A similar earnings result in the second half would get Telstra most of the way to the bottom end of its guidance range, but given earnings momentum Morgans expects reaching guidance is “comfortably achievable”. 

While 68,000 postpaid and 144,000 prepaid subscribers added in the half were a positive, postpaid numbers in particular were less than expected given numbers likely benefited from the Optus data breach and from improved migration as borders continued to open, with a price increase driving customer churn. 

Morgans sees Telstra benefitting from the strongest tailwinds telcos have experienced in a decade, a combination of price rises being issued across the majors and an increasingly economically rational market. 

Analysts unconcerned about the impact of handset sales 

Like Morgans, Macquarie was not overly concerned about lower mobile handset sales, anticipating a likely immaterial impact on results given the lower-margin nature of sales. The earnings result was a mere -1% miss to the broker’s (Outperform, target price $4.64) top of the pack forecast, and has adjusted its earnings outlook 2%, 3% and 1% through to FY25. 

Both Morgan Stanley (Overweight, target price $4.75) and Credit Suisse (Outperform, target price $4.60) are similarly rated. The former sees InfraCo Red, alongside mobile, as being a key driver of valuation, although the latter noted company commentary around InfraCo Red suggests a decision about a pathway to monetisation is not imminent which may have been disappointing to some investors.

Ord Minnett (Hold, target price $4.20) expects meeting full year earnings guidance to be an easier task given the first half earnings uplift, noting only a 7% increase would be required in the second half to meet the guidance midpoint. This broker also sees valid reasons for conservatism from Telstra, including that planned postpaid price increases could subdue subscriber growth. Similarly rated, UBS (Neutral, target price $4.40) highlighted it was yet to be seen whether price rises issued in a rational environment would stick longer-term. 

Outside of the FNArena database, Goldman Sachs (Buy, target price $4.60) feels Telstra is tracking towards the top end of its earnings guidance, extrapolating momentum from the first half and accounting for sequential benefits its expects to impact on the second half, including an average 4.5% improvement to Network Applications and Services margins and a 7.3% price rise on recurring NBN. This broker expects the company will deliver an 8.5 cent full year dividend, lifting to 9.0 cents in the next fiscal year.

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