Telstra crystal ball cloudy

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There was little consensus among equity analysts about the outlook for Telstra, following the company’s Telstra2022 strategy briefing last week. Fair value estimates and price targets were as high as $4.40 and as low as $2.30.

Telstra stock closed at $2.68 on Friday, its lowest point since 2011 and 58 per cent down on its peak of $6.48 in February 2015.

Morningstar is among the optimists, with a $4.40 fair value estimate on Telstra stock.

“It is the dominant player in the Australian telecom industry. It is the market leader in fixed voice, broadband and mobile services,” it says.

Morningstar says the company faces serious business risks. The NBN is changing the fixed broadband market and will leave Telstra with an estimated EBITDA fall of $3 billion.

“How the company deals with that issue will determine future earnings and the sustainability of dividends,” it says.

Telstra has outlined a radical simplification plan, involving cutting the current 1800 consumer and business product offerings to 20 core plans. Cost-cutting targets have been raised significantly, with 8000 jobs to be lost.

It is moving to new mobile plan structures that will remove a number of out-of-plan structures, such as excess data. It will start introducing new “Peace of Mind” plans in July. This will reduce revenue by an estimated $500 million over three years, according to one estimate

And it is proposing to split the company into MobileCo and InfraCo. InfraCo will be made up of Telstra’s fixed infrastructure assets, as well as NBN commercial works and Telstra Wholesale.

“The split strikes us as advisory/investment bank led sophistry, which has the potential to dilute management focus on more important matters at hand,” Morningstar says.

“What Telstra cannot control is the competitive environment. We have downgraded EBITDA forecasts for the next two years by around 11 per cent, based on the company’s guidance.

“Our $4.40 fair value is anchored on our long-term assumptions incorporating benefits of a competitively reawakened and organisationally more efficient company.”

One area the company did not address was dividends. Morningstar has forecast a 30 per cent downgrade to dividends per share, starting in the 2019 financial year.

“Even at our reduced DPS estimates, Telstra shares are on an attractive 5 per cent-plus yield in fiscal 2019, fully franked,” it says.

Macquarie Securities’ Telstra valuation is $2.70 a share and its 12-month price target is $2.75, based on the expectation of a 29.2 per cent fall in earnings per share in the 2019 financial year and 21 per cent the year after.

“We see dividends cut to 16 cents per share from FY19, reflecting lower earnings,” Macquarie says.

Citi has put a $2.30 price target on Telstra shares, saying it is “sceptical about the company’s ability to deliver on its increased productivity target.”

Citi is also concerned that the market’s expectations for future dividends need to be adjusted down further than they have been so far.


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