Shares in telco giant Telstra Corporation Ltd (ASX: TLS) briefly hit the $4 mark yesterday after releasing its FY21 results, which were received well by the market.
While the sentiment has picked up over the past year, many long-term Telstra shareholders are likely still underwater on their investment.
10-year Telstra share price chart
FY21 results recap
NBN headwinds and COVID-19 impacts made for a challenging FY21 for Telstra.
Total income fell 11.6% to $23.1 billion and underlying EBITDA came in at $6.7 billion. Costs seemed to be controlled, however, allowing net profit after tax to rise 3.4% across the period to $1.9 billion.
If you strip away the impacts that management claim to be transitory, things do look more optimistic on an underlying basis. Management believes the business is on track to return to full-year growth in FY22.
Telstra will be returning up to $1.35 billion worth of capital back to shareholders in the form of a buyback. These were the proceeds from the partial sale of its towers business. Telstra still holds a 51% stake in these assets.
This seems appropriate given its historically low share price. What’s more, it will provide a temporary boost to earnings per share (EPS) which could mean some more upside for current shareholders.
Where to now?
The fact that Telstra has given EBITDA guidance for the coming two years seems to imply management is somewhat confident in its turnaround play. It’s expecting between $7 billion to $7.3 billion in FY22. Then, it’s anticipating $7.5 billion to $8.5 billion in FY23.
The improvement is likely to be driven by a few main factors.
Firstly, management reckons that the current NBN headwinds ($650 million in FY21) will be mostly gone by FY23.
Data roaming charges from overseas travel have understandably come to standstill. Although the timeframe around the reopening is still unknown, one would expect things to normalise once this occurs.
Telstra will also hopefully see some nice tailwinds in the form of cost savings from its T22 strategy and the continued rollout of the 5G network.
Time to buy Telstra shares?
I see some more upside in Telstra’s valuation in the short to medium term, but it’s hard to argue that these catalysts will provide a sustainable advantage for say, 5-10 years.
For those with a shorter time frame or as someone who’s dividend-oriented, I could see the appeal in owning Telstra shares. That being said, there are probably other opportunities in higher-growth areas.
If you want to know more about Telstra, click here to read some more of my recent analysis: Why it could be finally time to reconsider Telstra (ASX: TLS) shares.
Also, I’d highly recommend signing up for a free Rask account and accessing our full stock reports. Click this link to join for free and access our analyst reports.
