Earnings wrap: Telstra, Woodside Petroleum
Telstra and Woodside Petroleum posted bumpy results but underlying fundamentals are strong in Morningstar's eyes.
Telstra retains fair value despite profit fall
Morningstar’s equity analyst Brian Han has retained his $4.40 fair value estimate for Telstra, applauding the telco’s ongoing efforts to cut costs and retain market share.
Han’s fair value estimate for Telstra (ASX: TLS) is 13 per cent above the current price. Han notes Australia’s No 1 telco has risen 40 per cent so far this year.
The company cut its final dividend to 8.0 cents per share from 11 cents a year ago, with its full-year payout down to 16.0 cents from 22.0 cents in FY18.
Telstra reported a 40 per cent fall in full-year profit to $2.15 billion and flagged another earnings squeeze next year as construction of the national broadband network nears completion.
Profit for the 12 months to June 30 fell from $3.59 billion a year ago on $800 million in previously announced restructuring costs and $600 million in earnings lost to the government-owned NBN.
Telstra closed at $3.87 on Thursday, down 1.78 per cent on a day when the market fell 2.8 per cent, its worst day since 6 February last year when it fell 3.2 per cent.
Telstra last week flirted with a two-year high of $4.00, and has climbed more than 40 per cent since its T22 restructuring program was announced in June last year.
On this front, it has done well, says Han.
“On the narrow-moat-rated group's ‘weight loss’ program, underlying fixed costs fell another $294 million in the second half ($456 million for the year).
“This confirms the solid progress on job-shedding, digitisation, and simplification, providing comfort management is on track to rip out $2.5 billion in costs by the end of fiscal 2022.”
Telstra said on Thursday the NBN had absorbed about $1.7 billion of earnings since FY16 and it expected to lose as much again by the time customer migration was complete.
The company said earnings lost to the NBN would increase to between $800 million and $1 billion in FY20.
On mobile, Han notes the "rejuvenated pursuit" for subscribers culminated in 11,000 prepaid and 139,000 postpaid additions in the six months to June 2019, with the latter category representing 45 per cent of the overall market gain.
“Despite Optus' aggression, Telstra's share held ground with momentum strong in the fourth quarter (over 60% of net total additions in the market),” Han said.
About $456 million in underlying costs savings were achieved over the financial year following staff cuts, digitisation measures and property sales.
Telstra's total income for the year decreased by 3.6 per cent to $27.8 billion, while and total operating expenses increased by 6.5 per cent to $19.8 billion on restructuring costs.
Telstra's guidance for FY20 forecasts a softer income outlook of between $25.7 billion and $27.7 billion.
Woodside remains strong despite soft headline
Morningstar analyst Mark Taylor has increased his fair value estimate for Woodside Petroleum, saying that despite a dividend cut and 23 per cent fall in profit the market is under-pricing the growth potential of its second Pluto LNG train.
Taylor has increased his fair value estimate for no-moat Woodside (ASX: WPL) to $47 from $46.50 because of the time value of money.
The oil and gas producer reported a 23 per cent fall in first-half 2019 NPAT to US$419 million, which fell short of Taylor’s and the market’s expectations.
However, Taylor notes this was chiefly due to accounting treatment of maintenance costs of Pluto LNG, tropical cyclone Veronica, and operating lease consolidation. Taylor says these were factored in don’t alter his long-term assumptions.
Woodside declared an interim dividend of 36 cents a share, down by 32 per cent. Taylor concedes he was “caught out” by the cut, which fuelled a 6.7 per cent fall in its share price to $31.70.
Despite a tough half, the actual group underlying performance was strong as expected, with net operating cash flow steady at US$1.2 billion and free cash flow up 40 per cent to US$870 million.
“At $31.70, we think the market unwisely underprices for growth potential,” Taylor said. “The chief underpinner remains construction of a second Pluto LNG train, added to by this year’s restart of Enfield oil production.”
“Woodside shares are down 5 per cent on the announcement, an income-focused market clearly unimpressed by the headline, and implication for yield.
"From our perspective as fundamental value investors the more important cash flow looks very strong and our focus remains on the growth potential from Pluto/Scarborough and NWS/Browse. Woodside’s Peter Coleman remains upbeat around this element with final investment decisions still slated for 2020.
“Woodside has decades more experience in operating and developing LNG projects in the Australian context than any other company. We have little concern on this front.
"And it will be undertaking developments in a far more contractor-friendly environment than last decade, meaning unlikely missteps would be less costly, as would the total price tag.
“Equally importantly, forecast global LNG demand continues to grow. Market expectations for global LNG demand in 2030 increased by 88Mtpa to around 600Mtpa in the two years to 2019.”
Full analyst report: Soft 1H Headline for No-Moat Woodside, but Underlying Remains Strong. FVE Increased to $47
Morningstar reporting season calendar
Morningstar has compiled a list of more than 100 companies that will release earnings results during the August Reporting Season.
We'll update this list daily with links to research notes from our Morningstar equity analyst team.
