Consumers are feeling the pressure of the rising cost of living, but mobile momentum continues for Telstra.
– Subdued mobile phone sales suggest customers are starting to feel the pressure on the cost of living
– Mobile operational momentum to continue
-InfraCo offers added value
By Danielle Austin
With fewer consumers buying new handsets, Telstra ((TLS)) has refined its revenue forecast to the lower end of its previous range, while maintaining headline metrics. With cell phone sales typically showing little to no margin, brokers widely expect the impact of lower sales to be insignificant.
More interestingly, according to Morgans (Add, target price $4.70), lower cell phone sales indicate that consumers are beginning to respond to rising cost-of-living pressures and are choosing to hold onto their existing cell phones longer.
In the first-half report, the company delivered 6% year-over-year revenue growth and 11% year-over-year earnings growth to $3,895 million, beating consensus expectations. The result was underpinned by a return to momentum in mobile growth, which could continue into next fiscal year and for now should help offset some of the weakness in the fixed line business.
The dividend was raised to 8.5 cents as expected by some not all brokers.
A similar earnings result in the second half would put Telstra most of the way to the bottom end of its guidance range, but given earnings momentum, Morgans believes hitting guidance is “comfortably achievable.”
While 68,000 postpaid and 144,000 prepaid subscribers added in half were positive, postpaid numbers in particular were lower than expected as the numbers likely benefited from the Optus data breach and from an improved migration as the borders widen opened, with a price hike driving customer churn.
Morgans sees Telstra benefiting from the strongest tailwind telecoms have seen in a decade, a combination of price hikes being dumped at the majors and an increasingly economically rational market.
Analysts unconcerned about the impact of mobile phone sales
Like Morgans, Macquarie was not overly concerned about lower handset sales and expected a likely insignificant impact on earnings given the lower margins on sales. The earnings result was just -1% below the broker’s top-of-the-pack forecast (outperform, price target $4.64) and has revised its earnings outlook by 2%, 3% and 1% through FY25.
Both Morgan Stanley (Overweight, target price $4.75) and Credit Suisse (Outperform, target price $4.60) are similarly valued. The former sees InfraCo Red as a key valuation driver alongside mobile, although the latter notes in a company comment on InfraCo Red that a decision on a monetization path is not imminent, which may have disappointed some investors.
Ord Minnett (Hold, target price $4.20) believes that meeting full-year earnings guidance will be an easier task given the first-half earnings surge, noting that second-half growth was just 7% would be required to achieve the forecast in the middle. This broker also sees valid reasons for Telstra’s conservativeness, including the fact that planned postpaid price increases could dampen subscriber growth. Similarly, UBS (Neutral, price target $4.40) emphasized that it remains to be seen whether price increases will last longer in a rational environment.
Outside the FNArena database, Goldman Sachs (Buy, target price $4.60) believes Telstra is nearing the high end of its earnings guidance by extrapolating momentum from the first half and accounting for the sequential benefits expected to roll over to the end of the year second half, including an average 4.5% improvement in network applications and services margins and a 7.3% price increase in recurring NBN. This broker expects the company to pay a full-year dividend of 8.5 cents, which will increase to 9.0 cents in the next fiscal year.
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