Telstra Corporation Ltd reports 36% jump in profit: Is it a bargain?

Source: Telstra presentation

2016 was a big year for Telstra Corporation Ltd (ASX: TLS), and 2017’s shaping up to be even bigger thanks to some announcements made by management in the group’s annual report today.

Here’s what you need to know:

(Note: I’ve used the ‘guidance basis’ results as these include Autohome and Pacnet’s contribution)

  • Revenues rose 6.3% to $28.3 billion
  • Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) rose 2.6% to $11 billion
  • Net profit jumped 36% to $5.8 billion including $1.8 billion from sale of Autohome shares
  • $3 billion investment in networks over next 3 years
  • $1.25 billion off-market buyback, $250 million on-market buyback ($1.5bn total)
  • Added 560,000 mobile customers and 235,000 fixed broadband customers
  • Final dividend of 15.5 cents per share, total dividends up 1.6% to 31 cents per share
  • Gearing (net debt divided by net debt plus equity) of 43.9%, albeit set to rise very soon
  • Interest cover (EBITDA divided by interest payments) of 13 times
  • Outlook for ‘mid to high’ single digit revenue growth, and ‘low to mid’ single digit EBITDA growth in 2017

So What?

Even excluding the sale of the Autohome shares, 2016 was a great year from Telstra, with revenues and profits rising, new customers added, dividends increased, a buyback, and positive cash flows. In my article earlier this week I suggested investors also pay attention to Average Revenue Per User (ARPU), customer churn, and whether the group fulfilled management’s goals for the year.

ARPU in the mobile division fell 1.6% due to lower excess data charges, yet subscriber numbers grew by 3% and customers are also growing their monthly commitment. Possibly ARPU will drop further as data allowances grow over time but this was a good result. Churn increased slightly for the year to 10.9% (10.7% at half year).

Management exceeded its goals by adding a significant number of new subscribers both in mobile and fixed broadband, while margins also widened. A $3 billion investment over the next three years should lift productivity further and transform a number of Telstra services as well as reduce ‘pain points’ for customers, hopefully improving the company’s Net Promotor Score (NPS) which unfortunately dipped during the year.

Now What?

The future of Telstra is an important consideration, with the group also flagging a $2 billion to 3 billion hit to EBITDA at the conclusion of the NBN rollout, within the next five years. This is hefty but with growth in other areas as well as the potential for further NBN servicing contracts, Telstra can offset some of the decline – but how much is an open question. If mid-single digit growth continues for the foreseeable future, there will be a hole left in Telstra’s earnings.

Recent acquisitions in Asia provide important avenues for expansion, while the drive for productivity should continue to result in rising savings through fewer interactions with staff. As Australia’s leading telecom company, Telstra retains its strong market and financial position, and can comfortably remain a dividend favourite. Investors do need to be cautious though, because it’s not a buy at any price.

Investors do need to be cautious though, because it’s not a buy at any price.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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