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JP Morgan Telstra Equity Research

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  • www.jpmorganmarkets.com

    Asia Pacific Equity Research

    23 April 2015

    Telstra CorporationNeutral

    TLS.AX, TLS AU

    Investor day- CY15E Mobile competition increasing,

    Impacting ARPU more than subscribers

    Price: A$6.26

    Price Target: A$5.38

    Australia

    Telecommunications

    Jarrod McDonald AC

    (61-2) 9003-8604

    jarrod.mcdonald@jpmorgan.com

    Bloomberg JPMA MCDONALD

    J.P. Morgan Securities Australia Limited

    Thomas Beadle

    (61-2) 9003-8603

    thomas.g.beadle@jpmorgan.com

    J.P. Morgan Securities Australia Limited

    James R. Sullivan, CFA

    (65) 6882-2374

    james.r.sullivan@jpmorgan.com

    J.P. Morgan Securities Singapore Private

    Limited

    YTD 1m 3m 12m

    Abs 4.9% -1.4% -1.3% 21.1%

    Rel -3.1% 0.7% -9.0% 14.9%

    Telstra Corporation Limited (Reuters: TLS.AX, Bloomberg: TLS AU)

    Year-end Jun (A$) FY13A FY14A FY15E FY16E FY17E

    Revenue (A$ mn) 24,776 26,296 26,240 28,405 29,584

    EBITDA (A$ mn) 10,295 10,684 10,708 11,455 12,244

    Net Profit (A$ mn) 3,739 4,275 4,136 4,647 5,284

    EPS (A$) 0.30 0.34 0.34 0.38 0.46

    P/E (x) 20.8 18.2 18.6 16.3 13.5

    EV/EBITDA (x) 9.0 8.4 8.5 8.0 7.4

    DPS (A$) 0.28 0.30 0.30 0.30 0.30

    Dividend Yield 4.5% 4.7% 4.8% 4.8% 4.8%

    Normalised EPS (A$) 0.30 0.33 0.34 0.38 0.46

    Normalised EPS Growth 4.4% 11.4% 1.1% 14.4% 20.9%

    Normalised PE 21.0 18.8 18.6 16.3 13.5

    Source: Company data, Bloomberg, J.P. Morgan estimates.

    Company Data

    Shares O/S (mn) 12,226

    Market Cap (A$ mn) 76,532.63

    Market Cap ($ mn) 59,350.62

    Price (A$) 6.26

    Date Of Price 23 Apr 15

    Free Float(%) -

    3M - Avg daily vol (mn) 32.25

    3M - Avg daily val (A$ mn) 205.26

    3M - Avg daily val ($ mn) 159.2

    ASX100 4874.00

    Exchange Rate 0.78

    Price Target End Date 31-Dec-15

    Price Target (A$) 5.38

    See page 9 for analyst certification and important disclosures, including non-US analyst disclosures.

    J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

    the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

    factor in making their investment decision.

    4.5

    5.0

    5.5

    6.0

    6.5

    7.0

    A$

    Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

    Price Performance

    TLS.AX share price (A$)

    ASX100 (rebased)

    TLS did not provide a trading update at todays investor day, with no new

    material data points forthcoming; we see the significance of todays

    presentation to the stock price therefore negligible. The main operational

    comments noted the increased competition in the CY15E mobile market.

    While mobile subscriber trends are not abnormal, we expect some impact

    on 2H15E Mobile ARPU given the increasing competitive landscape and

    changing mix. We are Neutral TLS, with a $5.38 PT.

    CY15E Mobile Market, increasing competition - While TLS

    acknowledged the increased industry competition in CY15E and

    increased churn (1H15E 12.0%), TLS stated they are not seeing

    anything 'abnormal' on subscriber numbers vs recent trends. We expect

    some impact on 2H15E Mobile ARPU given the increased competitive

    environment and the lower margins of additional services (i.e new phone

    feeling) vs the core business. TLSs guided to no change in Mobile

    EBITDA margins in the high 30%s (JPMe FY15E 41%, FY16E 40%).

    Network With consumers valuing network quality, TLS is focused on

    using technology to scale the network economically, with the increased

    consumer interaction (i.e. High bandwidth video)/number of devices and

    the internet of things materially changing the future network load. TLS

    see the future in voice/video calling and home automation/control.

    Emerging Consumer trends TLS highlighted a number of customer

    trends/expectations: 1) Video consumption - with a focus on Video

    quality/load time, and the customer experience 2) Upper end tablets

    Hybrids can replace PCs/Laptops 3) On Demand Entertainment at

    home & on the go, ability to take entertainment mobile & 4) Smart

    Home devices are becoming smarter, with the home eco-system coming

    together, TLSs focus is on Security/Automation & Energy.

    Maintain Neutral rating - While yield support may continue to see the

    stock trade around current levels, over the medium term we see the stock

    drifting closer to our valuation. We are Neutral TLS, with a $5.38 PT.

  • 2Asia Pacific Equity Research

    23 April 2015

    Jarrod McDonald

    (61-2) 9003-8604

    jarrod.mcdonald@jpmorgan.com

    Mobile in CY15E - competition intensifying, potentially

    impacting 2H15E ARPU

    The main operational comments by Warwick Bray, Executive Director - Mobile &

    Wireline, noted the increased competition in the CY15E mobile market. TLS stated

    they are not seeing anything 'abnormal' on subscriber numbers vs recent trends. We

    expect some impact on 2H15E Mobile ARPU (1H15E +2.8%), given the increased

    competitive environment and the lower margins of additional services (i.e new phone

    feeling) vs the core business.

    TLS re-confirmed the margin outlook in Mobile (i.e. high 30% range), with margins

    to be impacted by a range of factors going forward, including churn, re-contracting,

    and the introduction of lower-margin value-added services which are incremental to

    existing revenues. We forecast Telstras margin to hit 41% in FY15E, before falling

    to 40% in FY16E and medium term mobile margins of c.38%.

    The comments around the competitive environment follow the significant turnaround

    in the mobile market in 1H15, with market revenue growth of +6.5% (TLS +9.6%),

    reversing recent trends which were impacted by declines in MBB SIOs at the market

    level, a lower MTR and lower equipment revenues. 469k SIOs were added in the

    half, which was the highest rate of growth since the Jun-12 half. Telstras share of

    SIOs and revenue continued to grow, although we note Vodafones return to net SIO

    growth in 1H15, which we think may be partly responsible for higher level of churn

    by TLS in the half. We also note comments today around recent competitive

    developments potentially indicates continued net SIO growth at Vodafone.

    Figure 1: Mobile revenues growth by half (A$m)

    Source: J.P. Morgan estimates, Company data.

    Figure 2: Mobile revenues by half (A$m)

    Source: J.P. Morgan estimates, Company data.

    Figure 3: Total Mobile Market SIO growth by half (000s)

    Source: J.P. Morgan estimates, Company data.

    Figure 4: Mobile SIO growth in the Dec-14 half (000s, incl. wholesale)

    Source: J.P. Morgan estimates, Company data.

    11.0%

    6.1%

    4.6%

    7.4%6.4%

    3.8%

    9.6%

    3.7%

    -0.6%

    -2.9%-2.2%

    -1.2%

    0.9%

    6.5%

    -4%

    -2%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

    Telstra Market

    3,935 4,066 4,367 4,313 4,567 4,6334,861 4,807 5,327

    3,059 2,9863,124 2,886 2,933 2,692

    2,746 2,6192,927

    2,464 2,2752,318

    2,070 2,028 1,744 1,808 1,7261,770

    9,458 9,3279,809

    9,269 9,528 9,069 9,415 9,15210,024

    0

    2,000

    4,000

    6,000

    8,000

    10,000

    12,000

    Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

    Telstra Optus Vodafone

    174

    735

    973

    602 618

    823 846

    229

    395

    0

    200

    400

    600

    800

    1,000

    1,200

    Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

    395

    -17

    91

    469

    -100

    0

    100

    200

    300

    400

    500

    Telstra Optus Vodafone Market

  • 3Asia Pacific Equity Research

    23 April 2015

    Jarrod McDonald

    (61-2) 9003-8604

    jarrod.mcdonald@jpmorgan.com

    Figure 5: Share of mobile SIOs

    Source: J.P. Morgan estimates, Company data.

    1H15E Mobile Market Review

    1H15 Mobile Sub Adds Telstra added c.366K net additional subscribers in the

    half (JPMe +326K), while Optus lost 12K, with a +100K increase in mobile handset

    SIOs more than offset by the 112K decline in mobile broadband SIOs. Vodafones

    SIOs grew by +91k, the first half of growth since the Dec-10 half. We note the slight

    uptick in churn to 12.0% (1H14: 10.2%), with TLS highlighting a more competitive

    market environment.

    Figure 6: Share shift to Telstra, half-on-half

    Percentage points

    Source: Companies

    Figure 7: TLS Mobile Net Adds1

    1. Excludes wholesale. Source: Telstra, J.P. Morgan

    41.1% 43.0% 44.7% 45.9% 47.3%49.5% 52.2% 52.9% 53.3%

    31.9% 31.8%31.7% 31.5% 31.2%

    31.0% 30.5% 30.3% 29.8%

    27.0% 25.2% 23.6% 22.6% 21.5%19.5% 17.3% 16.8% 16.8%

    0%

    20%

    40%

    60%

    80%

    100%

    Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

    Telstra Optus Vodafone

    1.7%

    1.2%1.4%

    2.2%

    2.7%

    0.6%

    1.0%

    0.0%

    0.5%

    1.0%

    1.5%

    2.0%

    2.5%

    3.0%

    1H12 2H12 1H13 2H13 1H14 2H14 1H15

    982

    610 608649

    739

    198

    366

    0

    200

    400

    600

    800

    1,000

    1,200

    1H12 2H12 1H13 2H13 1H14 2H14 1H15

  • 4Asia Pacific Equity Research

    23 April 2015