Joint Venture With Accenture Will Expand AI Capabilities And Reinforce Future Market Leadership

Key Takeaways

• Telstra's strategic partnerships and network investments aim to boost its technology leadership and revenue through improvements in customer experience and connectivity.
  
• Capital optimization and cost management efforts focus on enhancing financial metrics and supporting growth through asset sales, share buybacks, and expense control.
  
• Competitive pressures, regulatory demands, and infrastructure challenges could strain Telstra's financial performance and affect revenue, profit stability, and operational efficiency.

Catalysts

Engages in the provision of telecommunications and information services to businesses, government, and individuals in Australia and internationally.

• Telstra's joint venture with Accenture to enhance AI capabilities is expected to expedite customer experience improvements and network leadership, potentially increasing future revenues and operational efficiency.
  
• Continuous investment in digital infrastructure, such as the intercity fiber network, is anticipated to drive long-term revenue growth by meeting rising connectivity demands, despite facing short-term delays and cost pressures.
  
• Implementation of advanced 5G technology through further network investment aims to maintain Telstra's market leadership in mobile connectivity, potentially enhancing revenue through increased ARPU and customer acquisition.
  
• Strategic portfolio management, including asset sales and a $750 million share buyback, indicates a focus on optimizing capital use to improve financial metrics like ROIC and support EPS growth over time.
  
• Ongoing cost management through productivity initiatives and role reductions aims to control operating expenses, enhancing net margins and supporting Telstra’s commitment to financial growth.

Telstra Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telstra Group's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 10.3% in 3 years time.
• Analysts expect earnings to reach A$2.6 billion (and earnings per share of A$0.23) by about April 2028, up from A$1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 30.1x today. This future PE is lower than the current PE for the AU Telecom industry at 39.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Telstra Group Future Earnings Per Share Growth

Risks

• Delays and cost pressures in the intercity fiber network rollout could impact the project timeline and financial returns, affecting future revenue and capital efficiency.
  
• Increased investment in mobile networks, notably to maintain a competitive edge, could strain capital resources with uncertain returns, potentially affecting future net margins.
  
• Structural declines in the Fixed Enterprise's DAC and calling business segments might continue to negatively impact EBITDA and profit stability.
  
• Competitive pressure in the telecommunications market, including from MVNOs and enterprises like TPG and Optus, could impact Telstra’s ability to maintain and grow customer revenue.
  
• Regulatory and strategic pressures to focus on universal service obligations and adjustments in core operations could lead to increased costs and operational challenges, impacting earnings stability.

Valuation

• The analysts have a consensus price target of A$4.347 for Telstra Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.7, and the most bearish reporting a price target of just A$3.45.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$24.9 billion, earnings will come to A$2.6 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of A$4.42, the analyst price target of A$4.35 is 1.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.