Telcos stand firm without tapping shareholders
Telstra leads a swag of telco players that are a safer bet than other sectors, says Morningstar's Brian Han.
Lockdowns left many of us wondering how we’d cope without an internet connection, and the share price strength of telecom companies supports this view of their essential nature.
During the coronavirus crisis, local telecommunication company shares fell an average of just 1 per cent versus a 17 per cent decline for the S&P/ASX200, says Morningstar’s Brian Han.
And they’ve done this without tapping shareholders, bucking the trend of equity raising that has been so prominent recently.
In the month of April alone, 60 Australian corporates raised just under $9 billion according to data provider Refinitiv. This marks the highest monthly total since the 2008 global financial crisis.
“Amid a sea of capital raising elsewhere, these five companies have tapped the credit market to shore up their balance sheets without going to the equity market,” says Morningstar senior equity analyst Brian Han.
“And they can do that because these creditors agree that these earnings are very defensive and very resilient.”
Han is quick to point out this doesn’t mean the companies haven’t been impacted, “but on a relative basis, they’re a safer bet than most other sectors.”
The below chart shows how share prices from each of the following telecommunications companies have fared since 20 February against the iShares Core S&P / ASX 200 ETF (IOZ), as depicted by the yellow line.
Telstra (ASX: TLS)
TPG Telecom (ASX: TPM)
Vocus (ASX: VOC)
Chorus (ASX: CNU)
Morningstar Rating: 2-star | Economic Moat: None | Price-to-Fair Value: 1.32
The dual-listed company is New Zealand’s largest owner of telecommunications networks with a near-monopoly in the nation’s fixed-line telephone and broadband networks.
Chorus yesterday became the last of the five telecommunications companies in Morningstar Australia’s research to reaffirm corporate guidance in recent months, announcing a NZ$350 million load had been extended on the expectation debt would be cut to NZ$290 million by 2022.
But Chorus is also currently the most expensive relative to Morningstar’s fair value estimates, its shares trading at a premium of more than 30 per cent.
Telstra (ASX: TLS)
Morningstar Rating: 4-star | Economic Moat: Narrow | Price-to-Fair Value: 0.74
Australia’s largest telecoms player Telstra remains Morningstar’s preferred pick in the category. The company’s $3.22 share price at midday Friday is 26 per cent below the $4.40 Han believes its stock is worth.
“Telstra’s defensiveness, solid balance sheet, and long-term upside from cost-out and 5G competitive edge would especially appeal to those who are watching the current market rally with incredulity,” Han says.
Two bond issuances by the group - $860 million in April following $940 million of credit facilities in mid-March – have boosted Telstra’s total on-hand credit to $3.6 billion. And management in March already indicated it is on track to deliver earnings of between $8.7 billion $9.6 billion for fiscal 2020.
Telstra’s performance since then support’s Han’s earlier view that the company was well-positioned to weather the storm. “It may even emerge on the other side a stronger incumbent,” Han said in his 20 March research note.
But investors haven’t yet bid up Telstra’s shares, which continue to show more value than those of its sector peers.
TPG Telecom (ASX: TPM)
Morningstar Rating: 3-star | Economic Moat: Narrow | Price-to-Fair Value: 0.92
Ahead of the merger with Vodafone completing later this month, TPG has secured three debt facilities: a $2.6 billion three-year loan; a $1.7 billion five-year loan and a $960 million revolving loan.
And management on 19 May confirmed it remains on target to deliver earnings of between $775 mllion and $785 million for fiscal 2020, excluding losses from its Australian and Singapore mobile businesses.
“This compares with our AUD 782 million forecast on the same basis,” Han says.
Vocus (ASX: VOC)
Morningstar Rating: 3-star | Economic Moat: Narrow | Price-to-Fair Value: 1.00
Focused squarely on corporate and government customers, Vocus owns an extensive fibre and data centre network built up over several years.
Vocus announced this week it had refinanced $1.25 billion of debt, from $1.14 billion, and rolled a NZ$135 million debt facility from NZ$150 million.
The company’s debt agreement with lenders has also been eased to 3.25 from 3, its net-debt-to-EBITDA of 2.8 also tipped to reduce to 2.6 by the end of fiscal 2020.
Management has slightly reduced its EBITDA guidance range for the year to between $359 million and $369 million – from a range of between $359 million and $379 million.
Spark New Zealand (ASX: SPK)
Morningstar Rating: 2-star | Economic Moat: Narrow | Price-to-Fair Value: 1.09
The other Kiwi telecommunications company in Morningstar’s stock coverage list, alongside Chorus, Spark also holds a strong position in New Zealand where it provides fixed line and mobile telephony services.
Han notes the company has been busy shoring up its credit position, extending a NZ$200 million facility in March by one year to April 2023.
Spark in April also established new combined NZ$150 million revolving credit facilities maturing in October 2021, and in June issued a six-year $100 million bond.
Management on 22 April reiterated its EBITDAI forecast of between NZ$ 1.10 billion and NZ$1,12 billion. Han’s forecast of $1.118 billion falls within this range.