Telstra shares have reacted favourably after reporting its 2021 half year result. The telco giant reported a -0.4% decline in total income to $12 billion and a 14.2% reduction in underlying operating earnings (EBITDA) to $3.3 billion. The latter was largely due to an estimated in-year NBN headwind of $370m and an estimated $170 million impact from COVID-19.
Positively, Telstra’s free cash flow was strong, allowing the board to maintain its 8 cents per share dividend, also confirming that it plans to maintain its fully franked full year dividend of 16 cents per share. Further, Telstra’s CEO was optimistic Telstra would return to growth in the 2022 financial year after years of profit decline. We also see a tailwind from the roll-out of 5G.
Telstra is undertaking a major restructure at the company level to position itself to buy the national broadband network (NBN) off the government. Telstra is in the process of splitting itself up as the NBN sale looms and in the process revealed to its investors its real value lies in its infrastructure assets. Telstra’s infrastructure business InfraCo will be divided into two separate units – InfraCo Fixed, which will own and run Telstra’s fixed line assets, and InfraCo Towers, which will own its mobile infrastructure. A third unit, ServeCo, will own Telstra’s retail mobile business, including the back-end technology and spectrum. This could provide a clearer view on the valuable assets that are already owned by the company, and a potential future avenue for sale or IPO which further strengthens our positive investment case.
Briscoes Group (BGP:NZ) HOLD: Great Result, But Reflected in Price
Briscoes (BGP) shares were higher after reporting another solid sales update for the final quarter of its 2021 financial year. Fourth quarter sales for the group came in at $248.1m, up +18.3% on the same corresponding period last year, benefiting from Black Friday and strong December trading period, as consumers continue to boost retail spending well after the initial lockdown restrictions were lifted. Full year sales were $701.8m, up +7.5%.
BGP is still our top retail pick given their strong performance in the past, no interest-bearing debt and the relatively defensive nature of their homeware businesses. With the lack of international travel, low interest rates and a booming housing market, local consumer spending is very strong. How this holds up when borders re-open remains to be seen. BGP’s Holdings of Kathmandu aren’t likely to pay any dividends anytime soon, and BGP’s dividend is no longer very attractive at current levels (3.2%).
Given BGP’s current valuation (19x earnings) with the shares trading at record highs, the market may be getting too optimistic that this recent surge in growth will continue at its current rate over the medium-term, in our view.
JAMES HARDIE (JHX:AX) BUY (High-Risk): Surging to Records
James Hardie shares have been on a strong run reaching new all-time highs after reporting a +50% jump in profit for the 2020 December quarter, upgrading 2021 full year profit guidance again as JHX benefits from surging residential construction activity.
Looking at the numbers, 3rd quarter profit of $123m was higher than market consensus at $106m. Full year 2021 guidance was increased to US$440-$450m (above current consensus at US$431m). All regions reported solid increases, due to strong demand and cost savings. A special dividend of US$0.70 was declared, with the company expecting to resume paying dividends in the 2022 financial year. Despite impacts of covid-19, JHX appears to be performing strongly thanks to new construction activity globally rebounding quicker than expected, helped by low interest rates and a supportive housing market.
We believe JHX are able to deliver and outperform during normal conditions and history shows it has done well to recover after the GFC. Despite JHX’s current valuation pricing in high expectations, the outlook appears to remain supportive for its major markets, while JHX is maintaining healthy margins from their restructuring efforts. However, we do caution there may be some share price volatility if there were a sudden shock to the economy – particularly with residential housing. Another risk we are watching is the strong Aussie dollar, which is a headwind given a significant amount of JHX’s business is from the US.
By Chas Gunaratne