Telstra just booked a 13% net profit lift - but one thing is ringing in the market's ears

Reflecting the modus operandi of many companies operating in today's market, Telstra is in the middle of a cost-out to the tune of $500 billion.

"While our cost reduction ambition is being challenged by high inflation, we still expect to achieve the majority of [this growth] by FY25," says Telstra CEO Vicki Brady.

Despite that, it's still managed a 13% lift in net profit to $2.1b, EPS growth of 16%, and a fatter dividend.

How did the market react? Negatively. It balked at the company's decision to hold onto its infrastructure business, InfraCo, after shopping it around to prospective buyers.

Nonetheless, as IMLs Daniel Moore explains in this wire, TLS is weathering well the strain of a tighter economic environment. And it's doing so with higher prices and - ironically - higher net promotor scores!

Note: This interview took place on Thursday 17 August 2023.

TLS Full Year Key Results

• Total income of $23.25b (+$5.4b) vs consensus of $23.36b
• NPAT of $2.1b (+13.1%)
• EBITDA of $7.86b (+8.4%) vs consensus of $7.93b
• Capex of $3.60b vs consensus of $3.55b
• Final DPS $0.085
• EPS of 16.7 cents (+16%)

Among ASX200 companies, TLS ranks #4 for sustainability reporting, #10 for supply chain risk management, and #10 for remuneration policy via MarketMeter research. 

Key company data

The result was in-line with expectations, with strong price growth in the mobile division offset by disappointment that the infrastructure division will be retained rather than sold.

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

Rating: APPROPRIATE

The stock's down 3%, reflecting that short-term disappointment about the lack of sale of the infrastructure business. I think that longer-term that decision's the right choice, but it is a disappointment in the short-term.

Do you believe that this is the peak for TLS's earnings this cycle?

No. They're still pushing through prices in their mobile and infrastructure businesses, so we expect further earnings growth and margin expansion.

Were there any major surprises in this result that you think investors should be aware of?

NPS scores rose to record levels despite strong price rises in their mobile division. It really shows the pricing power of that Telstra brand. It's pretty unusual to have price rises and NPS scores go up.

Would you buy, hold or sell TLS on the back of these results?

Rating: HOLD

It's a quality company with a dominant mobile business with strong pricing power. And they also own some essential infrastructure that has some good long-term potential, however that's largely reflected in the share price.

What’s your outlook on the telco sector? Are there any risks to this company and its sector that investors should be aware of?

We're positive on the outlook for telecommunications, given that industry returns are still quite low. We're seeing price rises across the sector. The risk would be a change in competitor rationality; if they were to start chasing market share instead of going after improved returns. But at this stage it's looking quite rational.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 4

Definitely we're cautious. Valuations are quite high and we see earnings risk due to the lagged impact of monetary policy and cost inflation and higher interest costs, which are impacting companies with the highest leverage.

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