Telstra Report In: Is The Share Price A Buy?

The Telstra Corporation Ltd (ASX: TLS) share price will be on watch today after releasing its 2019 full year results and cutting its final dividend.

Telstra is our country’s oldest telecommunications business, having built the first telegraph line in 1854. Today, the company provides more than 17 million retail mobile services, around 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services. Telstra also has operations in eHealth, network applications and subsea cabling.

Telstra’s Painful FY19 Report

Telstra reported that its total income fell by 3.6% to $27.8 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) dropped by 21.7% to $8 billion and net profit after tax (NPAT) declined by 39.6% to $2.1 billion. The market, according to Commsec and Bloomberg, were expecting net profit of $2.39 billion, so Telstra seems to have missed the mark here.

The telco also gave results based on a ‘guidance basis’ which assumed wholesale product price stability and no impairments, and excluded sales of businesses, mergers, acquisitions and purchase of spectrum…and so on. On this basis, total income only fell 2.6% to $27.8 billion and EBITDA excluding restructuring costs only dropped 11.4% to $9.4 billion.

Telstra put the blame for the drop in income and profit on the NBN. Management said Telstra suffered a negative $600 million of recurring EBITDA during the year. Underlying EBITDA would have only fallen by 4% excluding the NBN headwinds. Telstra said EBITDA has been impacted to the tune of $1.7 billion since FY16 and it’s only halfway through the recurring financial impact of the NBN.

But in positive news, Telstra had continued customer growth with 378,000 net retail postpaid mobile services added including 181,000 at Belong.

In terms of its T22 strategy, Telstra reduced costs by $456 million this year and has achieved $1.17 billion of cost reductions since FY16. It is on track to achieve its target of reducing net costs by $2.5 billion by FY22. Around 75% of the net 8,000 direct workforce to be made redundant has been identified.

Telstra is also trying to sell around $2 billion worth of assets. Yesterday, Telstra agreed to sell three international data centres in Europe and Asia. Telstra expects the proceeds to be around $160 million if the sale goes ahead.

The company has also reduced the number of consumer and business plans, introduced no lock-in plans & removed excess data charges and launched its commercial 5G service.

On the 5G side of things, the telco expects to increase its 5G coverage by almost 5x and reach 35 Australian cities.

Telstra Cuts Dividend Again

Telstra’s Board decided to pay a final dividend of 8 cents per share, comprising a final ordinary dividend of 5 cents per share and a final special dividend of 3 cents per share (paid for from the one-off NBN receipts).

This brings the total year dividend to 16 cents per share, a cut of around 27% for the year.

Is The Telstra Share Price A Buy?

Telstra expects total income to be $25.7 billion to $27.7 billion, underlying EBITDA to be between $7.3 billion to $7.8 billion, restructuring costs of around $300 million, capital expenditure of $2.9 billion to $3.3 billion and free cash flow after operating lease payments of $3.4 billion to $3.9 billion.

Therefore, Telstra is expecting further revenue and probably more EBITDA declines. Low cost competition from TPG Telecom Ltd (ASX: TPM) and others isn’t helping things for Telstra.

I don’t think Telstra is worth buying whilst its revenue and profit continue to deteriorate, particularly with how strongly the share price has rallied this year.

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