Tag: Australian Market

Investment Thesis

• Solid FY22 earnings guidance with management flagging a turning point as it expects mid to high single digit growth in FY22.
• Solid dividend yield in a low interest rate environment. 
• On market buyback of $1.35bn (post sale of part of Towers business), expected to be completed by end of FY22, should support its share price.
• Additional cost measures announced to support earnings.
• InfraCo provides optionality in the long-term. 
• Despite intense competition, subscriber growth numbers remain solid. 
• Company looking to monetize $2.0bn of assets. 
• In the long-term, the introduction of 5G provides potential growth, however we continue to monitor the ROIC from the capex spend. 
• TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
• Industry consolidation leading to improved pricing behavior by competitors. 
• The Company continues to deliver strong underlying earnings growth which combined with declining NBN headwinds could see the Company increase shareholder returns via increased dividends which combined with the remaining 60% of the current buybacks should support the share price

Key Risk

• Further cuts to dividends.
• Further deterioration in the core mobile and fixed business.  
• Management fails to deliver on cost-out targets and asset monetisation. 
• Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
• Any network disruptions/outages.
• More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
• Quicker than expected deterioration in margins for its Fixed segment.
• Risk of cost blowout in upgrading network and infrastructure to 5G.

Key highlights 1H22                        1H22 Results Highlights. 

• On a reported basis, total income declined -9.4% over pcp to $10.9bn, amid declines of ~$450m in one off nbn receipts and ~$200m in nbn commercial works. 
• Operating expenses on an underlying basis declined -8.5% over pcp, with underlying fixed costs declining -8.9% over pcp enabled by ongoing drive to digitise and simplify processes, move to an agile workforce and continued migration of fixed customers to the nbn network as well as focus on rationalising 3rd party vendors and services. 
• Underlying EBITDA increased +5.1% over pcp to $3.5bn driven by strong growth in Mobile. 
• Net finance costs declined -22.5% over pcp to $238m, primarily due to a reduction in interest on borrowings and financing items relating to contracts with customers. 
• Underlying EPS was up +55% over pcp to 6.2 cents per share, representing a strong start against T25 ambition for underlying EPS target of high teens CAGR from FY21-25. 
•  Net cash provided by operating activities declined -5.7% over pcp to $3,246m mainly due to a $1,193m decline in receipts from customers, partly offset by a $955m reduction in payments to suppliers and employees. FCF (after lease payments) declined -9.1% over pcp to $1,675m

Company Profile

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Investment Thesis

• Inventory issue remains a downside risk but can also provide upside surprise should management work through the excess inventory in its distribution channels. It appears the inventory is at target levels for some of the key channels. 
• Wining market share in Australia and China. 
• Growing consumer demand for health and well-being globally. 
• Demand growth in China for premium infant formula product.
• Expansion into new priority markets, aided by the capabilities of Fonterra.
• US expansion provides new markets + opportunities. 
• Key patents provide barrier to entry.
• Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

• Management fails to meet its revised FY21 guidance. 
• Chinese demand underperforming market expectations.
• Disruption to A2 milk supply.
• Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
• Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
• Withdrawal of A2M product from international markets due to market share loss or lack of market penetration. 

1H22 Results Highlights

• Revenue was marginally lower, down -2.5% to $661m but in line with guidance, and up +24.8% on 2H21, due to (i) China label IMF sales were constrained in 1Q22 to rebalance distributor inventory levels with sales falling -11.4% for 1H22 vs pcp; (ii) English and other label IMF sales fell -9.8% in 1H22 vs pcp with lower market share; (iii) ANZ liquid milk sales were up with higher market share, while U.S. liquid milk sales were down.
• EBITDA fell -45.3% to $97.6m due to lower revenue and gross margin as well as a +37.3% increase in marketing investment vs pcp. EBITDA margin of 14.8% in 1H22 (17.3% ex-MVM) was weaker versus 26.4% in 1H21. Gross margin percentage fell to 46.2% (with underlying gross margin of 50.7% excluding MVM), due to inclusion of MVM, adverse product mix and cost headwinds (especially raw milk and freight costs), partially offset by price increases.
• NPAT including non-controlling interest was down -53.3% to $56.1m.
• Balance sheet remains strong with closing net cash of $667.2m due to high operational cash conversion during 1H22. Inventory at the end of the period was $127.9m, higher than at the end of FY21, due to the inclusion of MVM.
• A2M noted the Mataura Valley Milk (‘MVM’) acquisition and strategic partnership with China Animal Husbandry Group (‘CAHG’) was completed in July 2021 and fully consolidated into the results.

Company Profile 

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China

(Source: BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.