Why Telstra is still the best defensive exposure on the ASX

Telstra’s (ASX: TLS) upbeat first-half result has been overshadowed by the tightening of its full-year earnings guidance, reflecting the disappointing performance of its Network Applications & Services (NAS) division.

The first-half result was largely in line with analyst expectations, boosted by strong earnings growth across mobile, consumer and infrastructure services but partially offset by a decline across its enterprise division. The stock is down around 1.3%, as of writing.

To understand more about Telstra’s moving pieces, we spoke to Michael Maughan from Tyndall Asset Management, who still believes Telstra offers the best defensive exposure on the market.

Key Financial Results

The below numbers refer to first-half FY24 results and comparisons against the prior period.

• Revenue +1.1% to $11.4 billion 
• EBITDA +3.8% to $4.0 billion
• Net profit after tax +11.5% to $1 billion
• Underlying ROIC +0.3% to 7.8%
• Earnings per share +12% to 8.4 cents/share
• Interim dividend +5.9% to 9 cents/share 
• For more financial data on Telstra, head to Market Index.

Full-year guidance

• Narrowed adjusted EBITDA guidance to $8.2 billion to $8.3 billion from prior guidance of $8.2 billion to $8.4 billion
• Revenue guidance of $22.8 billion to $24.8 billion
• CAPEX guidance of $3.6 billion to $3.7 billion

1. In one sentence, what was the key takeaway from this result?

Mobile profits have delivered, but Network Applications and Services (NAS) profits have completely evaporated, leading to a 2% EPS downgrade.

2. Were there any major surprises in this result that you think investors should be aware of?

The market was aware that Enterprise was under pressure, but NAS only generated $17 million in EBITDA, whereas the market was anticipating approximately $100 million. 

On a positive note, the mobile sector is thriving with increased subscribers and a 5.4% growth in APRU (average revenue per user). This is the primary driver expected to fuel earnings and dividend growth over the next few years.

3. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

It offers the best defensive exposure in the market due to its pricing power in an industry where demand for the core product, data, continues to grow. 

In comparison to other defensives, the risks from inflation are lower because people constitute a much smaller part of the cost base, unlike in the retail sector.

4. What’s your outlook on this stock and the sector over the year ahead and are there any risks that investors should be aware of?

The outlook appears positive due to the ongoing demand for data and the focus of all mobile players on improving returns after substantial investments in 5G.

The risks for telcos include irrational competition, technology, and regulation, but currently, these risks are relatively benign.

One aspect the market isn’t on top of is Telstra's investment of $1.6 billion in fibre projects, which won't generate revenue until FY26. Even then, the capacity in these "pipes" will be gradually sold over decades. This value is likely underestimated when considering today’s earnings.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?