How have ASX telecommunication shares performed during the August 2021 earnings season?

It's been a good year for Telstra, but how have some of the other ASX telecommunication shares fared in FY21.

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The Australian telecommunication landscape is dominated by Telstra Corporation Ltd (ASX: TLS), but there are a host of smaller players listed on the ASX that are making their mark on the industry.

The August earnings season gave investors the opportunity to examine the performance of not just Telstra, but ASX telecommunication shares including TPG Telecom Ltd (ASX: TPG), Spark New Zealand Ltd (ASX: SPK), and Chorus Limited (ASX: CNU). 

How have ASX telecommunications shares performed against the market?

Telstra shares have performed strongly this year. The Telstra share price is up 28% year to date, compared to 12.5% for the All Ordinaries Index (ASX: XAO) over the same period.

Shares in Spark are up just 0.73% for the year, trading slightly below levels last seen pre-COVID. The TPG share price, on the other hand, is currently down 6% since January. Similarly, the Chorus share price has fallen 9.2% in 2021. 

Who are the telco winners this earnings season? 

Telstra announced it had reached a turning point in its financial performance and outlook in FY21.

The telecommunications giant delivered results in line with guidance and is projecting earnings growth in FY22. Telstra says it is building financial momentum. It reported strong performance in its mobile business, green shoots in certain growth businesses, and a diminishing impact from the NBN.

Total income decreased 11.6% to $23.1 billion and reported EBITDA decreased 14.2% to $7.6 billion in FY21. Profits, however, increased 3.4% to $1.9 billion.

Shareholders will receive a fully franked final dividend of 8 cents per share, consisting of an ordinary dividend of 5 cents and a special dividend of 3 cents, This brings total dividends for the year to 16 cents per share. 

Telstra is three years into a four-year transformation strategy. The company says it is on track or has delivered around 80% of its targets.

"We have transformed Telstra to become a simpler, more digitally enabled and leaner business," CEO Andrew Penn said.

The company is undergoing a restructure which involves the separation and sale of InfraCo Towers. Up to $1.35 billion of the proceeds will be returned to shareholders in FY22 via an on-market share buyback.

According to Penn, this is a clear demonstration of how the company is creating additional long-term value for shareholders. The remainder of the proceeds from the transaction will be used for debt reduction to ensure Telstra maintains balance sheet strength and flexibility. 

Spark New Zealand reported its half-year results last month which revealed a decline in revenue driven by a loss of roaming revenues. Nonetheless, the phone and internet provider managed to deliver earnings growth at the top end of the guidance range thanks to disciplined costs management.

Revenue declined 0.8% to $3,953 million but Spark New Zealand's earnings grew 1% to $1,124 million. Higher depreciation and amortisation costs and an increase in tax expenses drove a decline in profits, with NPAT falling 8.6% to $384 million. Mobile service revenue grew 0.5%, but the broadband market saw a revenue decline of 1.3% due to continued competitive pressure and slower overall market growth.

Although the New Zealand economic recovery has been stronger than expected, closed international borders are impacting Spark New Zealand through the loss of roaming revenues and lower overall growth in some markets. 

And the losers?

Chorus was another telecommunications provider that experienced a drop in revenue due to softer market conditions. Together with competition from other fibre and wireless networks, this resulted in a $12 million drop in revenue compared to FY20.

Chorus' earnings, however, increased marginally at $649 million compared to $648 million in FY20. This was thanks to tight management of costs and the absence of once-off COVID-19 costs incurred in FY20. Chorus boasted 871,000 active fibre connections at the end of the financial year, up from 751,000 the year before. This is well on the way to Chorus' target of 1 million connections next year. 

The TPG share price dipped on the release of the company's half-year results last month, which revealed an 8% drop in profits. This was impacted by the fact that HY20 profits benefitted from a one-off accounting credit.

The HY21 results reveal the full impact of the Vodafone TPG merger, as the HY20 results only had four days' contribution from TPG Corporation. Reported revenue increased 71% from HY20 to $2.63 billion while TPG's earnings increased 67% to $886 million. The merger synergy program is on track and delivered $38 million in cost synergies during HY21 as part of its $70 million synergy target for 2021. 

What is the outlook for ASX telecommunication shares?

Telstra is predicting a return to growth for its underlying business in FY22. The company has provided full-year guidance for income of $21.6 — $23.6 billion and earnings of $7.0 — $7.3 billion.

The company is continuing to progress the proposed corporate restructure of its organisation, which involves the creation of separate subsidiaries. The restructure is expected to be undertaken by way of a scheme of arrangement, for which shareholder approval should be sought before the end of the year. 

Spark New Zealand has significant infrastructure investments planned for FY22. An additional $25 million is being invested to accelerate the 5G rollout. This will support the company in delivering 90% population coverage by the end of calendar 2023. Spark New Zealand is also exploring shared ownership models for 'passive' components of its mobile network and fibre. Discussions are ongoing in this regard and there is no certainty any transaction will proceed. 

TPG's key strategic focuses for the second half of the year are bringing more fixed customers onto its own infrastructure, improving mobile performance, and achieving its merger cost synergy target. It is on track to reach 85% 5G population coverage in 10 of Australia's largest cities and regions by the end of 2021, supporting future growth in mobile and home wireless. 

Chorus has provided guidance for FY22 earnings of $640 million — $660 million, with total dividends of 26 cents per share. The company is transitioning to a new dividend policy based on a majority pay-out range of free cash flow.

The dividend is temporarily constrained by high capital expenditure related to ultra-fast broadband, however Chorus expects to provide further detail on the dividend outlook in February 2022. 

Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended TPG Telecom Limited. 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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