As one of the few listed companies on ASX that can maintain a semblance of earnings guidance, Telstra ((TLS)) has indicated FY20 operating earnings are likely to be at the lower end of the range.
In that way the company has reduced its EBITDA guidance to the lower end of $7.4-7.9bn, with free cash flow expected at the lower end of $2.9-3.3bn.
A significant proportion of this downgrade is from the mobile segment, as roaming revenue goes away because of restrictions on international travel. The rest of the downgrade comes from the extra data Telstra will offer to consumers & small businesses and the freeze on job cuts amid the hiring of temporary personnel.
UBS notes the update does not include potential offsets arising from corporate capacity upgrades, higher demand for mobile upgrades and reduced subscriber acquisition costs, albeit these are difficult to quantify.
The broker assumes the impact of the crisis carries into the first quarter of FY21 and cuts estimates for earnings per share by -10-13%. Even if the crisis is more protracted, UBS expects the $0.16 dividend is secure as long as Telstra’s A credit rating is not threatened and there is room to grow operating earnings to $8bn.
Credit Suisse is also comfortable the dividend can be sustained, implying a yield of over 5%. Nobody likes an earnings downgrade, Morgans asserts, but in the context of the current crisis this is a small price to pay.
No specific comments were made about the second half dividend but, if the global economy does rebound in the next six months, the board may look through current weakness and use the special dividend policy to prop up the dividend. However, if the global economy stalls for longer then the sustainability of the $0.16 dividend is at risk, the broker asserts.
Credit Metrics
Equity markets appear most concerned with balance sheets and liquidity versus fundamental valuations, Morgans notes. Consequently, the broker sets its price target ($3.73) at a discount to fundamental valuation.
As credit markets tighten the focus is on debt metrics and ability to finance maturities. In this instance, Credit Suisse points out, Telstra is in a good position, with sufficient undrawn facilities ($2.5bn) to cover upcoming maturities. Two tranches of debt mature in the next six months, including $1.5bn in March and $500m in July.
Credit Suisse observes that during the SARS outbreak, Singapore Telecom’s mobile revenues were affected by reduced use of roaming services, but the impact was short-lived and growth returned after the end of the outbreak.
Similarly, Telstra’s earnings are expected to be generally more resilient than those of other sectors. Morgan Stanley acknowledges this but remains fundamentally cautious, sticking with an Underweight rating.
ESG
While disappointed with the downgrade, Ord Minnett concedes the impact occurs at the margins and the core business will hold up despite severe restrictions on travel and everyday life. The broker welcomes the initiatives the company is undertaking for the community.
Telstra is pausing job reductions, hiring temporary call centre staff (around 1000), suspending late payment fees for those in distress, and stimulating the economy by bringing forward planned expenditure by six months. Rather than monetising the demand for data the company is increasing data limits on many plans.
Ord Minnett considers this is a strong example of how a major company can help the community in which it operates, without overly affecting shareholders, and Morgans agrees.
UBS points out Telstra is only deferring labour reductions, and temporary labour costs will eventually cease. The broker retains a Buy rating predicated on a more rational mobile market and the potential upside from other more rational NBN outcomes, or a mobile bypass of the NBN.
FNArena’s database has five Buy ratings and one Sell (Morgan Stanley). The consensus target is $3.86, suggesting 30.7% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.4%.
