Analysts applaud Telstra vision

Investors and analysts alike have welcomed Andy Penn’s momentous announcements on Thursday.

Credit Suisse slapped an ‘outperform’ rating on Telstra, and set a 12-month target price of $3.09.

Telstra’s announcement that it would separate into three legal entities has been met with a rousing reception by analysts, who said Telstra’s infrastructure had been previously undervalued, and investors who have sent the company’s shares up on Friday.

Telstra on Thursday said it would unlock billions of dollars worth of telecommunications infrastructure through a three-way split of its operations, in a move described by chief executive Andy Penn as one of the most critical since the telco was privatised.

The shake-up would allow the telco to better monetise infrastructure opportunities through a potential sale of its vast holdings of mobile phone towers, particularly given the increased value in 5G and fixed line telecommunication assets. The restructure would also pave the way for Telstra‘s infrastructure arm InfraCo to one day bid to buy the national broadband network from the government.

Investors sent Telstra up 3 per cent on Thursday then a further 1 per cent on Friday, with its shares sitting at $3.12

Goldman Sachs said in a note it values InfracoFixed – the arm with Telstra‘s NBN payments, fibre and property – at $34bn, and InfraCo Towers at $4.5bn. Goldman gave Telstra a 12-month price target of $3.60, an upside of 20 per cent from its current price.

Teltra‘s books had given InfracoFixed a valuation of only around $9bn before any separation.

UBS said in a note Telstra “remains a conviction buy”, and set an aggressive 12-month price target on the telco of $3.70.

‘We think TLS has languished below $3 for three broad reasons, namely the market taking an overly bearish view on: dividends, underlying asset/infrastructure valuations, and mobile industry competition,“ UBS said in a note.

Telstra CEO Andy Penn. Picture: Aaron Francis/The Australian

“Our conviction Buy on TLS remains and is premised on the potential to surprise on all three fronts, with respective catalysts for each being: the AGM/1H21 result for the dividend, Investor day/CY21 for asset/sum of the parts (SOTP) upside (partially crystallised today with TLS announcing a tower monetisation process in CY21, and additional InfraCo disclosures a potential catalyst for the market to refocus on fundamental valuations), and potential industry pricing moves and/or a return to TLS mobile growth in CY2.

Credit Suisse meanwhile slapped an ‘outperform’ rating on Telstra, and set a 12-month target price of $3.09.

“InfraCo detail reaffirms value on offer,” analysts wrote. ”The disclosures at today’s investor day around InfraCo, in our view, reinforce the value of the underlying assets – while the TowerCo earnings before interest, taxation, depreciation and amortisation (EBITDA) was lower than we had estimated, plans to increase the tenancy ratio over time could justify a multiple in line with European (at ~20x EBITDA) or even US (at ~25x EBITDA) peers.

“Based on our updated valuation for InfraCo, we estimate that ServeCo (or the remainder of TLS) is now valued by the market at 5.1x. While this valuation is not as low as it was when we last undertook the analysis at the end of October (at ~4x), it is nonetheless reasonably attractive given it applies to cyclically depressed earnings and the absence of roaming revenues.”

Telstra chief executive Andy Penn on Thursday described his plans as ‘good for the country’.

“It’s the next step in crystallising the value from our infrastructure,” Mr Penn told The Australian.

“It’s good for customers, it’s good for our people, and it’s good for the country. Historically, telecommunications has been a bit too much fixed in this technology or that technology … What customers want is they want to be connected, and they want a great experience”.

Telstra will next provide an update on its plans in February 2021.