Australia | 11:17 AM
Telstra's FY26 results weren't bad, but they have raised questions about the telco's premium valuation against slowing postpaid growth, higher capex and rising competition.
- Telstra's valuation has opened up debate about its 'expensive defensive' premium
- An ongoing slowdown in postpaid mobile and softer FY27 guidance weigh on general sentiment
- Ongoing defensive qualities and the mighty free cash flow generation support capital management
- What exactly will be the impact from new satellite technologies remains up for debate
By Danielle Ecuyer
Caution going into FY26 results
Anyone paying attention to research updates prior to the Telstra Group ((TLS)) result release would have caught wind of a growing hesitation around the telco's valuation.
The flight to perceived quality inside the Top 50 stocks on the ASX200 swept up Telstra in a rally which saw the shares advance to a 52-week high of almost $5.60 in mid-May.
Just over a week later, UBS pulled the rip cord on the stock, downgrading Telstra to Neutral (Hold-equivalent).
Post a relative 15% outperformance compared to the ASX, UBS cast doubts around management’s forecast to achieve its targeted rise in return on invested capital to 10% by FY30 from 8%.
The stock was viewed at the time as trading at fair value and at a 14% premium to European/US peers.
Since then, the share price has retreated by almost -15%, while the ASX200 has reached new 52-week highs.
At the same time, the prospect of longer-term competition from Low Earth Orbit Satellite (LEOS) communication capabilities has come into sharper focus, with the listing of Musk’s SpaceX and ambitions to grow Starlink.
An unfortunate national mobile outage also elevated the national debate around mandatory roaming and the regulatory response from the Federal Government.
When good isn't good enough on mobile
Against this backdrop, the FY26 results arguably had to be ‘gold plated’ to not draw a negative response from the market.
The Telstra story, as has been reinforced this week, is on one hand about the trade-off between how management can continue to grow earnings by pulling both price, cost and necessary investment levers.
The second consideration, and arguably one flagged by most analysts, is the valuation, relative to the trade-offs to achieve growth when facing macro headwinds, regulatory risks and competition.
Digging into the FY26 metrics, the major red flag for the market, reflected in the share price reaction, was the slippage in the postpaid mobile results.
As explained by Morgans, the FY26 result came in at the middle-to-top end of guidance, which wasn’t sufficient for the “marginal buyer” and the stock fell -3% on the day.
Mobile represented around 60% of FY26 EBITDA, Morgans noted, and as highlighted across brokers, the mobile subscriber trends were mixed. Postpaid subscribers fell -7k y/y, reflecting a third half of year-on-year decline and apparently “spooking” some investors, according to Morgans.
Prepaid services in operation grew by 5k. Positively, postpaid churn improved to 12.8% by 0.5%. Wholesale also grew.
UBS estimates postpaid represents around 65% of mobile services in operation, with wholesale/mobile virtual network operators (MVNOs) at 19% and prepaid the remainder.
Citi emphasises the “key talking point” was the acceleration in the decline in postpaid users. Citi sees competition as part of the issue, but the more likely factor are the Telstra price increases.
Although the rises were intentional, the higher cost to the consumer has occurred at the same time as rising cost of living pressures weigh on budgets, in addition to a weak macro backdrop and a general slowing of industry subscriber growth.
Overall Mobile Services growth in 2H26 came in below expectations. For Citi, the factors are considered one-offs, such as lower roaming revenue and revenue write-backs, and resulted in mobile average revenue per user falling in the second half on the prior half, despite the price rises.
Morgans, in contrast, saw mobile price rises and higher average revenue per user across the full year as the key factors underpinning earnings growth.
This analyst believes average revenue per user growth of 3%-5% in the last three halves supports the view that Telstra retains pricing power.
A weaker macro environment weighs on mobile customers
UBS has a different take and continues to be cautious around the ongoing move to MVNOs, where mobile operators sell plans without necessarily owning the infrastructure.
The UBS analyst remains cautious on the ability of premium brands like Telstra to continue to raise prices above inflation. The group’s wholesale subs share grew 2% points to 19%, accelerating from the prior 1%-point run rate and supporting momentum in the MVNO market.
Telstra’s own MVNO brands are Belong and Boost.
UBS forecasts wholesale to stabilise around 24% of the Telstra base. The broker’s Evidence Lab survey has indicated a notable decline in brand perceptions across all operators and metrics for the first time in six years.
UBS now forecasts postpaid subs to contract by -0.2% or -18k p.a. from a flat growth forecast previously with the shift to MVNOs.
Inflation-linked average revenue per user growth is forecast at 2.5% over the medium term.
Citi envisages overall mobile revenue to grow by a forecast 4%, with a pick-up in mobile services revenue growth to around 5% in FY27 from circa 4% y/y in 2H26, but Hardware revenue is expected to slip on the weaker macroeconomy, implying fewer handset upgrades.
Morgans believes the multi brand strategy is working, with prepaid and wholesale growth more than offsetting postpaid trends.
Management remains focused on cost cutting
With mobile growth becoming harder won, costs assume greater importance in the FY27 earnings equation.
From a top-down view, Macquarie noted group revenue slipped by around -1% y/y while underlying EBITDA rose 4%. Management achieved a decline in underlying operating expenses of -$454m or -3%, with circa 50% of savings coming from divestments and product exits, the analyst explains.
For FY27, Citi expects operating expenses to decline by around -$550m or -4% y/y, resulting from several factors, including lower hardware cost of goods sold and lower redundancy costs.
AI is also increasingly being brought into the productivity equation. Telstra’s 2027 remuneration framework has shifted the focus “from AI adoption to measurable impact”, with management now accountable for moving from “measuring activity, usage and capability build to rewarding tangible operational outcomes” re AI.
Ord Minnett points out that, to reach the midpoint of management’s FY27 EBITDA guidance, the company will need to find an additional $300m of earnings. Ord Minnett believes the growth can be achieved through mobile service revenue growth, including prepaid and wholesale price rises, as well as a suite of cost savings, as also noted by Citi.
Macquarie articulates the FY27 outlook succinctly, “mobile services operating leverage is being offset by redundancies and satellite-to-mobile costs”. Cost reduction is a key earnings driver.
Morgans saw FY27 guidance, offered for the first time, as in line with consensus expectations.
Notably, the market remains cautious around the potential threats from Low Earth Orbit satellite providers, such as Starlink, as well as scope for an ACCC regulatory review.
The bottom line for Morgans is that the regional mobile market will become more competitive, with satellite technology potentially disruptive to Telstra’s long-held coverage advantage.
Management stressed that it sees satellite as a complementary technology that extends coverage into places where building terrestrial mobile infrastructure is uneconomic.
“Satellite does not have the capacity to replace mobile in the majority of areas.”
The FY26 result indicated strategic investment guidance for FY23-FY28 had been lifted to $1.8bn from $1.6bn, reflecting inflation.
While overall capex guidance was higher than anticipated, Ord Minnett noted it forecasts free cash flow over FY27-FY30 of $17bn-$18bn, enough to fund higher capex, a 1c per share rise in the dividend plus a share buyback.
Both Jarden and Morgan Stanley articulated at the time of the SpaceX IPO that satellite services will be real disrupters in the market, with Australia an attractive market to target due to the large land distances and low population density, as well as the relatively high average revenue paid by consumers for mobile and broadband services.
Increased investment and pressure on pricing are viewed as likely to lower the ‘premium’ rating ascribed to Telstra.
Which brings the debate back to valuation.
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