Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

External factors have been weighing on the stock price of narrow moat-rated Telstra, opening up a 6.2% fully franked yield and 15% discount to our unchanged AUD 6.00 fair value estimate.Expectations of rising interest rates (especially in the U.S.) are reducing Telstra's comparative yield appeal, a dynamic that is reverberating across other defensive sectors. However, even after spending an extra AUD 1 billion per year in capital expenditure over the next three years, Telstra should still generate AUD 3.5 to 4.0 billion in free cash flow, largely covering DPS of AUD 0.31 (or around AUD 3.8 billion). This capacity is further augmented by a strong balance sheet, with net debt/EBITDA of 1.3 times (after adjusting for the AUD 1.5 billion buyback)--a metric that is at the low-end limit of management's 1.3 to 1.8 times comfort range. Critically, we believe Telstra is capably managing factors within its control. In the near term, this has manifested in the reiteration of fiscal 2017 EBITDA guidance (low to mid-single-digit growth) at the AGM. Longer term, the group is clear of the challenges ahead (EBITDA hole of AUD 2 to 3 billion per annum once the National Broadband Network, or NBN, has rolled out). Management is prudently canvassing ways to plug this earnings hole, culminating in the recent decision to reinvest an extra AUD 3 billion in the domestic network infrastructure (where it boasts a competitive advantage) and walk away from the Philippines mobile market (where it does not).Analyst: Brian Han

External factors have been weighing on the stock price of narrow moat-rated Telstra, opening up a 6.2% fully franked yield and 15% discount to our unchanged AUD 6.00 fair value estimate.Expectations of rising interest rates (especially in the U.S.) are reducing Telstra's comparative yield appeal, a dynamic that is reverberating across other defensive sectors. However, even after spending an extra AUD 1 billion per year in capital expenditure over the next three years, Telstra should still generate AUD 3.5 to 4.0 billion in free cash flow, largely covering DPS of AUD 0.31 (or around AUD 3.8 billion). This capacity is further augmented by a strong balance sheet, with net debt/EBITDA of 1.3 times (after adjusting for the AUD 1.5 billion buyback)--a metric that is at the low-end limit of management's 1.3 to 1.8 times comfort range. Critically, we believe Telstra is capably managing factors within its control. In the near term, this has manifested in the reiteration of fiscal 2017 EBITDA guidance (low to mid-single-digit growth) at the AGM. Longer term, the group is clear of the challenges ahead (EBITDA hole of AUD 2 to 3 billion per annum once the National Broadband Network, or NBN, has rolled out). Management is prudently canvassing ways to plug this earnings hole, culminating in the recent decision to reinvest an extra AUD 3 billion in the domestic network infrastructure (where it boasts a competitive advantage) and walk away from the Philippines mobile market (where it does not).Analyst: Brian Han

Telstra Managing Factors Within Own Control While External Headwinds Blow

Telstra Corp

Telstra Managing Factors Within Own Control While External Headwinds Blow