Our telecommunications analyst Nick Harris recently provided an update on Telstra reviewing the financial year 2016 result.
Telstra’s financial 2016 result and 15.5 cents fully franked final dividend met expectations. Guidance for “mid-single digit earnings growth” combined with a ~A$1.5bn share buy-back should see TLS deliver earnings and dividend growth in FY17.
TLS positively surprised with better customer adds than expected and added more mobile customers in the current half (despite network challenges) than it did in second half of 2015 (pre challenges).
In our view this proves a loyal customer base exists, which values TLS’s network dominance and they are prepared to see through the short-term network challenges TLS has experienced.
Telstra reported an impressive headline result with reported profit surging 36 per cent to A$5.8 billion. This did however include a ~A$2 Bbillion gain on the divestment of AutoHome and profits on a continuing basis were down 7pc year on year to A$3.8 billion. Operating cash flow and free cash flow grew strongly year on year and allowed TLS to increase the final dividend 0.5 cents to 15.5 cents per share fully franked.
After divesting AutoHome for a A$2 billion profit and with National Broadband Network payments starting to accelerate, TLS’s balance sheet was starting to look lazy so TLS has decided to put the funds to work in the form of larger capital investments and capital management.
TLS announced it will undertake an A$1.25 billion off-market share buy-back and a A$250 million on-market share buy-back which will accelerate earnings per share growth due to a lower share count.
Customer trends were better than many expected and despite some network challenges TLS still added 299,000 net mobile and broadband customers between second half of 2015 and second half of 2016 and 83,000 between first half of 2016 and second half of 2016.
Changes to forecasts
Financial year 2016 included the divestment of AutoHome so we have rebased our financial year 2016 forecasts on updated numbers (for the continuing business). We have also incorporated TLS’s guidance for capital expenditure at 18pc of revenue (which is above their previous 15pc range). The net result is our free cash flow forecast declines 3.4pc in financial year 2017. On a like-for-like basis we now forecast 4pc normalised earnings per share growth for financial year 2017, from 6pc growth previously.
Looking to key results due this week:
Monday: Aurizon, JB Hi Fi, Orora
Tuesday: BHP Billiton, Domino's Pizza
Wednesday: Challenger, CSL, QBE
Thursday: ASX, Sydney Airport, Tatts
- Boh Burima Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410