Telstra profit, shares nosedive

Nicki Bourlioufas | 16 Feb 2017

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Telstra announces a sharp drop in underlying profit to $1.79 billion for the half year to 31 December 2016, down from $2.09 billion a year earlier, with revenue falling in the key mobile and broadband markets on intense competition.

 

Revenue dropped to $12.8 billion, from $13.7 billion. Telstra’s earnings before interest, tax and depreciation were $5.18 billion, a 2.4 per cent rise from 1H 2016.
 
Although Telstra (ASX: TLS) added 200,000 domestic retail mobile services, its mobile revenue fell sharply, by 8.7 per cent, to $5 billion during the half. Telstra’s retail customer base now totals 17.4 million customers.

Overall revenue from Telstra's fixed-line or broadband business fell 4.7 per cent to $3.3 billion. Fixed data revenue grew 1.8 per cent to $1.3 billion and fixed voice revenue fell 9.4 per cent. 
 
"This half shows the impact of the competition and the NBN, with earnings down in the key areas of mobile and broadband," said Brian Han, senior equity analyst, Morningstar Australia.

Some good news for Telstra was that NBN connections grew by 292,000 to 792,000 at the end of December, with Telstra’s market share now approximately 51 per cent.

Management"We continue to lead the market with a total of 792,000 NBN connections, an increase of 292,000 in the half,"the company said.

Chief executive officer Andrew Penn said the results showed Telstra had performed well in a highly competitive market, gaining customer numbers and increasing market share in NBN.

“It is significant that we were able to increase subscriber numbers in mobiles and retail fixed plans despite the increased competition.

“Data volumes have increased and intense competition on pricing across fixed, bundles, mobile, data and IP has had an impact. Those are in parallel with the acceleration of the rollout of NBN, which, over the longer term, will have a negative impact on EBITDA of $2 to 3 billion," Penn said.

Telstra is set to lose its wholesale business when the government-owned NBN broadband network replaces Telstra's copper lines, with completion expected around 2020.

For the full year, Telstra reconfirmed its forecast of mid- to high-single digit net income growth and low to mid-single digit operating earnings growth, but said it was now likely headed for the bottom end of the range given the intense competition for broadband and mobile customers.

Telstra shares closed sharply lower at $4.85, down 6.6 per cent, as investors sold down the stock on concerns about its profitability given narrowing margins.

"There is now some doubt about whether Telstra can achieve its earnings guidance, because all the competition has raised doubts in people’s minds.

"Yes, Telstra is growing its customers, despite some high-profile network outages over the last 12 months. But Telstra is paying to get those customers. While people want more and more data, whether on their phones or via broadband, they don’t want to pay more, and Telstra can’t raise their prices as their customers would just go to another provider," Han said.

The company will pay an interim dividend of 15.5 cents a share, which will deliver a yield of about 6.3 per cent to shareholders, based on an expected full-year dividend of 31 cents, Han said.

The author owns Telstra shares.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.