Bottomline impacted due to NBN rollout and intense competition: Telstra Corporation Limited (ASX: TLS) is a well-diversified telecommunication company with the principle activity of providing mobile phones, mobile devices, home phones and broadband internet services in Australia market. The company has five main business verticals, i.e., consumer and small business segment, Enterprise, Wholesale, Operations, and Others which contributed around 51%, 28%, 10%, 4%, and 7% revenue in total revenue respectively, in FY18.
FY18 was a challenging year for the company as its product mix segment demonstrated lower earnings than expected due to rise in competition for mobile customers and the impact of NBN rollout. As a result, Profit attributable to the equity shareholders of Telstra was down by 8.4% to $3,563 million against $3,891 million in FY17. Moreover, EPS contracted for the FY18 at 30.0 cents per share compared to 32.5 cents per share in FY17. Based on the performance, the Board of Director reduced its fully franked full-year dividend from 31 cents per share to 22 cents per share in FY18, equating to a payout ratio of 65% of net profit after tax including net one-off nbn receipts. However, the group has consistently distributed stable dividends with healthy payout ratios. We expect that the company is likely to continue its high dividend payout policy in years to come. The company has the annual dividend rate of 4.82%.
Lately, the group announced that there will be no change to its capital management framework and it forecasts its Capex to sales ratio in the range of 16% to 18% in FY19, while Capex to sales ratio is expected to be around 14% over the medium term. As per the management, the company witnessed the subdued performance in 2018 because of the stiff competitive pressures and is expecting the same to continue in 2019. Importantly, the company has not commented on FY20 impact from the new NBN plan, thus, there might be a possibility that Telstra will be a bit back on track in FY20 and thereafter.
We are of the view that the company has a potential to perform better in the long run as they have recently introduced Telstra 2022 Strategy which could be a game changer for the company. Hence, we expect that the company will rebound its growth momentum fuelled by improving fundamentals, and support from top management structural changes, simplification of product portfolio, and continuous product innovation.
Technical View: TLS has performed well over past three months generating a positive return of 13.84% and shares may move higher from the current level. The stock price has rebounded in a sharp V pattern after taking support at the level of $2.981. A potential breakout is in sights above the resistance level of $3.220. 14-day Relative Strength Index (RSI) looks in line with the price movement not highlighting any sign of fading of the prevalent momentum in the price. We believe that slew of positive developments and FY19 outlook can fuel the stock higher from the current levels of $3.205.
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