ANALYST’S NOTE

TLS reported its FY18 results, with EPS, NPAT and EBITA coming in above analyst estimates by +5.7%, +4.4% and +0.7%, respectively. However, this beat was driven by lower depreciation expense relative to expectation due to TLS extending the useful life of a fixed asset.

Total income for the year was up +3.0%, whilst EBITDA fell -5.2% and NPAT was down -8.9%. The key positive from the result was the strong growth in postpaid subscriber growth (+304k) in mobile, with a particularly strong second half of the year (as TLS increased its value proposition relative to competitors such as pricing and data inclusions).

However, ARPUs remain under pressure. No dividend guidance was provided and we believe maintaining 22cps DPS will be a struggle (consensus currently sits at 17cps for FY19E). Maintain Neutral given the many moving parts with TLS operationally and the stock looking fully valued on an ex-NBN payment basis.

• Key FY18 headline numbers. 1. On a reported basis, total income was up +3.0% to $29.0bn, EBITDA down -5.2% to $10.1bn, NPAT down -8.9% to $3.5bn and EPS reduced -7.7% to 30.0cps. 2. The FY18 final dividend was declared at 11cps (fully franked), bringing the total dividend for the year to 22cps which comprises of the ordinary divided of 15cps and a special dividend of 7cps in accordance with TLS’s revised dividend policy. 3. Free cash flow (FCF) of A$4.9bn was above pcp of $4.0bn due to improvement in working capital, partly offset by increased cash capex on strategic investments. 4. Underlying core fixed costs reduced by -7%. 5. Gross and net debt reduced by -4.9% and -3.9%, respectively, using free cash flow generated in FY18. 
• Declining ARPU and accelerated NBN rollout – drag on EBITDA. 1. Mobile revenue grew +0.4% on the prior corresponding period but mobile broadband revenue declined by -10.3%, dragging down mobile EBITDA by -6.3%. ARPU continues to decline due to increased competition, lower prices and increased data allowances. 2. Accelerated rollout of NBN is putting pressure on other segments, with $1.4bn of annual $3.0bn impact already absorbed, reflecting a decline of Fixed segment EBITDA. Fixed segment revenue declined by -9.2% to $5.8bn and EBITDA declined by -34.6%, with performance largely impacted by the increased rate of NBN migration and increasing pressures due to competition.
• FY19 guidance unchanged. Management reaffirmed guidance with income expected to be between $26.5bn – $28.4bn and EBITDA (excluding restructuring costs) of $8.8 -$9.5bn.
• No dividend guidance. The Company did not provide any guidance on dividend, however in our view the Company will find it difficult to sustain 22cps per share given the pressure on earnings. We note consensus is forecasting TLS to pay a dividend of 17cps in FY19E.
• Cost outs on track. Management continues to progress on its cost-out strategy, with underlying costs down -7% year-on-year and management achieving $700m in savings (since FY16) against their target of $2.5bn.