Telstra: UBS says 'compelling buy'
Robert Guy
Telstra's chairman John Mullen's backing of the 16¢ dividend has sparked the biggest rally in the telco's share price in three months and allayed one of the fears identified by UBS as worrying investors.
UBS, which reckons the telco is a "compelling buy", has taken a closer look at four issues it reckons has been holding the share price back, with fears the dividend could be cut being one of them.
The broker has a 14¢ a share total dividend forecast for the 2021 to 2025 financial years based on the midpoint of Telstra's current dividend policy settings, but notes the company may adopt a "more aggressive" payout to maintain a 16¢ dividend.
UBS says Telstra is a "compelling buy". Steven Siewert
Mr Mullen told shareholders at the annual general meeting that the board is prepared to temporarily overshoot its payout ratio to ensure it continues to pay shareholders an annual dividend of 16¢.
UBS says another concern is the belief that 2021 financial year underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $6.5 billion and $7 billion could be weighted towards the second half.
This would imply a "material gap" between underlying earnings per share and dividends per share in the first half.
The broker reckons earnings will be weighted to the second half because of the effects of legacy discounts on mobile growth, hard year-on-year first half comparisons because of COVID-19, and cost cuts are more likely to be weighted to the second half.
It is forecasting first half EBITDA of $3.25 billion compared to $3.5 billion in the second half.
A third issue is elevated competition following the launch of the 5G iPhone as providers use temporary discounting to entice customers to buy the latest offering. But UBS reckons this will be a transient issue.
The fourth issue is the NBN's new corporate plan and its effect on Telstra's data and IP earnings. UBS has already modelled a drop in the segment's earnings to around $800 million by the 2023 financial year.
UBS rates Telstra a buy with a price target of $3.70 a share.
Telstra InfraCo divestment book value around $11 billion, November update on this, page-3
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