Friday, 12 February 2021 12:19

S&P sees positive signs in Telstra's half-yearly results Featured

S&P sees positive signs in Telstra's half-yearly results Image by Gerd Altmann from Pixabay

Ratings agency S&P Global Ratings says there are positive signs that Telstra's underlying earnings may have reached an inflection point, support by receding NBN headwinds, momentum in its restructuring strategy and its mobile leadership in Australia.

The agency said on Friday it expected Telstra to return to underlying earnings growth in fiscal 2022 (the year ending 30 June 2022) and to maintain a healthy buffer for the current rating.

The big telco announced its results for the second half of the current financial year on Thursday, reporting a drop in both total income and profit.

It reported total income of $12 billion for the six months, a drop of 10.4% over the corresponding period for the previous financial year. Profit was down by 2.2% to $1.1 billion, which means the amount it pays out as dividend — $950 million — will be only slightly less than its profit.

S&P pointed out that Telstra had narrowed its underlying EBITDA forecast for fiscal 2021 to between $6.6 billion and $6.9 billion, from between $6.5 billion and $7 billion previously.

"At the same time, the company upgraded free cashflow guidance as it continues strong free cashflow generation, supported by working capital improvements and the impact of lower hardware revenue," it said.

Despite the likely weaker underlying EBITDA in fiscal 2021, Telstra had signalled its ambition for mid- to high-single digit growth in underlying EBITDA for fiscal 2022, S&P said.

"Moreover, the company firmed its fiscal 2023 return on invested capital target to 8%. We expect the recovery to be supported by growth in mobile services, leadership in 5G, and the broader T22 strategy of simplification, cost-out and capital efficiency, which is now 80% complete."

Telstra chief executive announced the T22 strategy in June 2018, saying the company would effect a net reduction of 8000 employees and contractors by 2022 and reduce two to four layers of management, leading to the cutting of one in four executive and middle management roles.

S&P said it anticipated that Telstra's fully adjusted debt-to-EBITDA ratio would remain comfortably below its downgrade trigger of 2.5x for the rating.

"The company has declared an interim dividend of eight cents per share and total dividend for fiscal 2021 of 16 cents per share. The ordinary interim dividend payout ratio was 125% of underlying earnings, higher than the range indicated in the group's capital management framework (70% to 90%)," S&P said.

"That said, we note the group remained well within its debt servicing, gearing, and interest coverage financial parameters and has completed and exceeded its target of monetising up to $2 billion of assets.

"Telstra is progressing with plans to monetise its tower assets. We do not anticipate that this transaction will have any material ratings upside given that cash proceeds from tower sales are likely to be offset by our recognition of a lease liability."

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Sam Varghese

Sam Varghese has been writing for iTWire since 2006, a year after the site came into existence. For nearly a decade thereafter, he wrote mostly about free and open source software, based on his own use of this genre of software. Since May 2016, he has been writing across many areas of technology. He has been a journalist for nearly 40 years in India (Indian Express and Deccan Herald), the UAE (Khaleej Times) and Australia (Daily Commercial News (now defunct) and The Age). His personal blog is titled Irregular Expression.

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