Telstra Corporation Ltd (ASX: TLS) has reported its FY21 result today, but I wouldn’t want to buy at this share price.
Telstra’s FY21 half year result
The telco giant reported its result for the six months to 31 December 2020. Telstra reported that its total income fell by 10.4% to $12 billion.
Looking at the day to day profit, reported EBITDA (EBITDA explained) decreased by 14.7% to $4.1 billion. After adjusting for lease accounting changes (AASB 16) on a like for like basis, EBITDA fell by 11.7% to $4 billion.
Underlying EBITDA fell by 14.2% to $3.3 billion. The largest two contributors to the decline were the NBN headwind impact of $370 million and an estimated $170 million impact from COVID-19. Excluding both of these, underlying EBITDA was broadly flat compared to the first half of FY20.
Net profit fell 2.2% to $1.1 billion.
Mobile growth
Telstra revealed that its mobile customer numbers continue to increase. During the half, the telco added more than 80,000 postpaid handheld mobile services. It also added over 46,000 prepaid handheld users and more than 163,000 wholesale mobile services across prepaid, postpaid and the ‘internet of things’ services.
However, despite user growth, mobile revenue declined due to lower hardware sales and the impact on international roaming earnings from COVID-19.
Reported postpaid handheld average revenue per user (ARPU) declined 8.6% for the half, or approximately 3% if the impacts of international roaming were removed. Telstra explained that the decline was all due to non-economic accounting impacts, out-of-bundle declines and Belong dilution, with impacts from recent pricing changes now positive.
Telstra has strong confidence in the outlook for mobile ARPU, as it expects pricing impacts to continue to strengthen.
The company’s 5G coverage now covers more than 50% of the Australian population.
T22
Telstra continues to work on its T22 strategy with cutting costs.
It says that it has now reached 80% of the milestones for T22 have now been delivered or on track to be delivered.
Telstra says that it has set a target of high single digit growth in underlying EBITDA in FY22 and $7.5 billion to $8.5 billion of underlying EBITDA in FY23 as a result of its T22 work.
The company said that it reduced underlying fixed costs by another $201 million, or 7%, during the half and increased its productivity targets to $450 million in FY21. It also increased its productivity target from $2.5 billion to $2.7 billion by the end of FY22. Around $2 billion has already been delivered.
Outlook
Telstra has revised its guidance.
It said that total income guidance for FY21 has reduced from a range of $23.2 billion to $25.1 billion, down to a range of $22.6 billion to $23.2 billion – a reduction of more than $1 billion looking at the mid-point.
Telstra also provided guidance for second half EBITDA in the range of $3.3 billion to $3.6 billion, compared to $3.3 billion in the first half.
This means full year EBITDA guidance is now $6.6 billion to $6.9 billion, assuming a NBN headwind of approximately $700 million.
The guidance range for free cashflow after operating lease payments was increased from a range of $2.8 billion to $3.3 billion, to a range of $3.3 billion to $3.7 billion, due to working capital management and the impact of lower hardware revenue.
Telstra dividend
The Telstra board decided to maintain the dividend at 8 cents per share and provided guidance of 16 cents per share for the annual FY21 dividend.
Summary thoughts
Telstra provides an important service for a lot of customers. The prospect of rising underlying EBITDA and better mobile ARPU sounds appealing for the next couple of years.
However, the fact is that revenue and EBITDA are still falling, after many years of declines. It’s good to hear that Telstra is extending its coverage, which may lead to reasonable market share growth whilst it’s ahead of competitors, but I’m yet to see how 5G will lead to much higher revenue and profit for the telco.
For that reason, I don’t see how the Telstra share price can deliver long term outperformance compared to many other ASX dividend shares that also offer good dividends.
Instead of Telstra, I suggest getting a free Rask account and accessing our full stock reports. Click this link to join for free and access our analyst reports.
