Telstra share price under pressure, what is majorly hurting the Telco?

Summary

• Telstra share price has been under the radar ever since it unveiled its full year results ended 30 June, on 13 August, which experienced a y-o-y plunge in total income NPAT, EPS and revenue amid COVID-19 headwinds.
• Notably, Telstra’s financial results were in line with the Company’s FY20 guidance. Also, the total dividend for the year stood at 16 cents per share (cps) amid fulfilment of its free cash flow FY20 guidance of AU$3.3 billion to AU$3.8 billion and noting of free cash flow in FY20 of AU$3.4 billion.
• However, Telstra’s reduced FY21 guidance in comparison with FY20 clearly exemplifies the fact that its earnings would reflect the impact of COVID-19 pandemic turbulent waves in the upcoming period.
• Telstra’s FY21 earnings guidance anticipates underlying EBITDA to fall amid AU$6.5 – AU$7.0 billion. The in-year nbn headwind for FY21 is anticipated to be around AU$700 million. Telstra believes that to accomplish growth omitting the in-year nbn headwind in FY21, underlying EBITDA would be required to hover near the middle point of the guidance range.

On 8 September 2020, the benchmark S&P/ASX200 index (ASX:XJO) ended in the green zone at 6007.8, up by 1.06% from its last close.

Similarly, ASX 200 listed telecom giant, Telstra Corporation Limited (ASX:TLS) last traded at AU$2.92, up by 1.389% compared to its previous close.

Of late, Telstra share price has been witnessing the turbulence from COVID-19 headwinds and is under pressure.

Telstra shares have given negative returns of 13.69% and 10.23% in the last one-month and three-month period, respectively.

You must be wondering what led to significant pressure on the Telecom giant?

Well, Telstra share price has been under the radar ever since it unveiled its full year results ended 30 June, on 13 August 2020.

Although FY20 results experienced a y-o-y plunge in total income(-5.9%), NPAT (-14.4%), EPS (-15.5%), revenue (-6.1%), these financials numbers were in line with its FY20 guidance.

Also, Telstra’s total dividend for the year stood at 16 cents per share (cps) amid fulfilment of its free cash flow after operating lease payments mentioned in FY20 guidance of AU$3.3 billion to AU$3.8 billion and noting of free cash flow in FY20 of AU$3.4 billion

Source: Company’s Presentation, dated 13 August 2020

Telstra’s reduced FY21 earnings guidance in comparison with FY20 exemplifies the fact that its earnings would be impacted by the COVID-19 pandemic turbulent waves in the upcoming period as well.

Source: Company’s Presentation, dated 13 August 2020

As per Telstra’s management, they are sure that “adjusted for recent accounting changes, EBITDA, post the nbn, should strike amid AU$7.5 – AU8.5 billion in order to make dividend of ~16 cents per share under the payout ratio of 70 - 90% in the Company’s capital management framework.”

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With this backdrop let us quickly skim through the financial results for the full year ended 30 June 2020.

Financial performance

The Company’s total income noted a plunge of 5.9% (y-o-y) and was recorded at AU$26.2 billion, establishing the fact that Telstra was in accordance with its FY20 guidance range of AU$25.3 - AU$27.3 billion.

Furthermore, Telstra’s net profit after tax (NPAT) and earnings per share (EPS) experienced a decline of 14.4% and 15.5% and stood at AU$1.8 billion and 15.3 cents, respectively.

FY20 revenue of Telstra’s largest segment, Consumer and Small Business also noted a fall of 6.7% and was recorded at AU$13,326 million.

This decline was also echoed by a fall of 8.4% (y-o-y) in fixed products, and -5.2% (y-o-y) was noted in mobile services revenue.

Notably, Telstra’s total mobile revenue noted a decrease of 4.4% (y-o-y) to AU$10,084 million, owing to a plunge down in its prepaid and postpaid Average Revenue Per User (ARPU) and lesser hardware volumes.

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Furthermore, revenue from enterprise segment plunged by 3.3% (y-o-y) to AU$7.970 million, primarily due to a reduction in the Data & IP legacy calling as well as legacy fixed products.

It is worth noting that these declines were offset by a considerable fall of 14.5% (y-o-y) in the operating expenses (on a reported basis) during FY20. Reduction in TLS’ FY20 operating expenses noted at AU$16,951 million was ascribed to robust progress made on the front of its T22 strategy.

Telstra’s reported EBITDA was noted at AU$8.9 billion and at a granular level, underlying EBITDA (on a guidance basis) of AU$7.4 billion was in line with its guidance range, despite representing a fall of 9.7% (y-o-y).

Furthermore, the result was inclusive of an estimated net negative impact from the turbulent waves of the COVID-19 pandemic of ~AU$200 million which were in related to less international roaming, financial support for the users, additional provisions of bad debt and postponements in NAS professional services contracts.

Telstra also unveiled a fully franked final dividend of 8 cents per share, which is due for payment on 24 September 2020.

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Telstra’s operational performance during FY20 with robust growth of the customer base represented its strengthened market position in the competitive telecom sector of Australia.

During the year 2020, Telstra experienced an addition of 240,000 retail postpaid handheld services;171,000 retail prepaid handheld users; 652,000 IoT services; and 347,000 wholesale services.

On the earnings guidance front, TLS projects the following for FY21 –

• Total income between AU$23.2 - AU$25.1 billion;
• Capital expenditure b AU$2.8 - AU$3.2 billion;
• Free cashflow after operating lease payments to strike amid AU$2.8 - AU$3.3 billion; and
• Underlying EBITDA in the range of AU$6.5 - AU$7.0 billion.