Telstra (TLSYY, Financial) (TTRAF, Financial) (ASX:TLS, Financial) shares have fallen of late, but a recent Barron’s article indicated that it may be of value.
Earnings performance
In February, the $37.8 billion telecommunications company delivered its results for the half-year ending in December. The Melbourne, Australia-based company reported a 3.6% sales decline to 12.8 billion Australian dollars ($9.581 billion) and 14.4% profit decline to 1.79 billion Australian dollars – a 14% profit margin compared to 16% in the year-prior period.
Telstra fell 6.15% the day after the earnings release.
Guidance
(Financial results)
Total returns
Telstra has acted inversely to the broader Standard & Poor's 500 index in the past year, providing 18.2% total losses to its shareholders vs. 14.7% gains. The company's shares also underperformed the index with 4.15% total gains vs. 13.7%Â in the past five years.
Valuations
Telstra is modestly undervalued compared to its peers in terms of price-earnings (P/E) valuation. According to GuruFocus data, the phone company had a P/E of 9.4 times vs. the industry median of 20 times, a price-book (P/B) value of 3.5 times vs. 2.2 times and a price-sales (P/S) ratio of 2 times vs. 1.5 times.
Telstra had a juicy dividend yield of 7.4% with a 112% payout ratio.
Telstra
The company has the largest and most reliable mobile network in Australia and now covers over 2.4 million square kilometers and 99.3% of the Australian population. Telstra received ~95% of its revenue from Australian customers last fiscal year.
In 2016, Telstra added 560,000 mobile customers bringing the total number of services to 17.2 million. Meanwhile, Australia had a total population count of 23.13 million as of 2013 (World Bank data).
Telstra has four reportable segments: Telstra Retail, Global Enterprise and Services, Telstra Operations and Telstra Wholesale.
(Annual report and financial results: *total income included revenue from external customers and other income and was used as base for calculating EBITDA margin moving forward.)
Telstra Retail
Telstra Retail consists of the company’s Consumer and Business units. According to Reuters, the Telstra Retail segment provides telecommunication products, services and solutions across mobiles, fixed and mobile broadband, telephony and Pay television/Internet Protocol television and digital content.
During the first six months of fiscal 2017 operations, Telstra Retail sales* fell by 5.6% to 8.18 billion Australian dollars or 59.7% (largest contributor) of total income from continuing operations –Â which included revenue from external customers and other income.
The segment also delivered an EBITDA** margin of 54% –Â same level of profitability compared with the year-prior period.
(**Filings: EBITDA contribution excludes the effects of all intersegment balances and transactions with the exception of transactions referred to under the segment results and reconciliation of EBITDA table.)
(Annual report and financial results)
Global Enterprise and Services
The Global Enterprise and Services segment provides sales and contract management for business and government customers (Reuters).
In the recent half-year operations, sales* in Global Enterprise and Services fell 4.8% to 2.97 billion Australian dollars or 21.7% of total sales and generated an EBITDA margin of 38%, 1% below the year-prior period.
(Annual report and financial results)
Telstra Operations
The Telstra Operations segment offers overall planning, design, engineering and architecture and construction of Telstra networks, technology and information technology solutions (Reuters).
From June to December 2016, sales* in Telstra Operations grew impressively by 116% to 525 million Australian dollars – 3.8% of total sales – and reported an EBITDA loss of 1.32 billion Australian dollars compared with 1.4 billion in the year-earlier period.
The segment has consistently given total losses to Telstra in the past two fiscal years.
(Annual Report and Financial Results)
Telstra Wholesale
The Telstra Wholesale segment provides a range of telecommunication products and services delivered over Telstra networks and associated support systems to other carriers, carriage service providers and Internet service providers (Reuters).
From June to December 2016, Telstra Wholesale sales* grew 1.8% to 1.33 billion Australian dollars, or 9.7% of total sales, and generated an EBITDA margin of 92% (highest and most profitable among segments) –Â same level of profitability as the year-prior period.
(Annual Report and Financial Results)
All other
Sales* in the segment grew 48.4% to 696 million Australian dollars or 5.1% of total sales – a higher contribution than Tesla Operations – and generated an EBITDA loss of 258 million Australian dollars compared to 462 million Australian dollars lost in the year-prior period.
Like Tesla Operations, the All other segment delivered losses in the past two fiscal years.
Total sales profits
(Annual Report and Financial Results)
According to Morningstar data, Telstra had a three-year sales growth average of 0.43%, a profit growth average of 14.9% and a profit margin average of 18.6%.
Cash, debt and book value
As of December, Telstra had 1.2 billion Australian dollars in cash and cash equivalents and 17.2 billion Australian dollars in debt with ratio to total equity of 1.18 times vs. 1.09 times in June 2016.
Of Telstra’s 41.8 billion Australian dollars assets 21.9%Â were labeled as intangibles with a book value of 14.6 billion Australian dollars compared to 15.9 billion in June 2016.
Cash flow
(Financial Results)
Six months into Telstra’s fiscal 2017, cash flow from operations declined by 14% to 3.2 billion Australian dollars compared to the year-prior period.
(Annual Report and Financial Results)
Capital expenditures, meanwhile, were 2.2 billion Australian dollars, leaving Telstra with 962 million Australian dollars in free cash flow compared to 1.48 billion the year prior; 355% of free cash flow, or 3.42 billion Australian dollars, was used to provide dividends and share repurchases whereby the company averaged 118% free cash flow payouts in the past two years.
(Annual Report and Financial Results)
Telstra also took in 104 million Australian dollars in debt proceeds in net repayments in the last six months.
Conclusion
Telstra experienced an overall business slowdown heading to its fiscal 2017 operations. Even without the one-time discontinued operations it gained in the year-prior period, profits still would have declined by 11.8%.
Specifically, Telstra’s Retail and Global Enterprise and Services segments, which generated 81.4% of total income businesses, experienced a sales decline but still exhibited similar levels of profitability in the comparable period in 2015.
The company also displayed a leveraged balance sheet accompanied by a good amount of intangible mix.
Telstra’s cash flow also appeared to be steady although the company has been a bit more generous to its shareholders in terms of dividends and share repurchase activities in recent years.
Meanwhile, 17 analysts have an average price target of 4.72 Australian dollars per share –Â 11.6% higher than the recent share price of 4.23 Australian dollars. Applying a three-year sales growth average and price-sales multiple before asking for a 25% margin would indicate a value of 51.97 billion Australian dollars, or 4.4 Australian dollars per share.
In summary, Telstra shares are a hold with a value of 4.7 Australian dollars per share.
Disclosure: I do not have shares in any of the companies mentioned.
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