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Evan Lucas, Research Analyst, IG

Fundamentally, most see Telstra (TLS) as expensive.

Price earnings are high and the income trade looks thin. With company guidance warning of low-digit growth in earnings numbers, yesterday saw TLS dropping 1.2% on positioning.

Expectations were for earnings before income tax, depreciation and amortisation (EBITDA) of $10.6 billion; the actuals came in a $10.69 billion, which is a 3.9% increase on last year and a slight beat on estimates. However, it is at the very bottom of guidance, which was 4% to 6%.

However, putting earnings aside, other head-line figures will certainly put a smile on most Telstra investors’ faces. Revenue came in at $25.67 billion versus the consensus of $25.5 billion, a 1.2% increase year-on-year. Net profit jumped 12% year-on-year to $3.81 billion, again ahead of consensus of $3.7 billion.

Earnings per share was also a solid number at 30.7 cents, which is a 14.9% jump year-on-year; this sees the payout ratio at 91% locking in dividend policy of the last five years for a 28 cents full-year dividend, which will see the final 14 cent pay out on the 23 August .

These are all very pleasing headline numbers. However, for TLS to continue to justify its current $5 price tag, customer growth in key product areas was always going to be needed.

With 40% of TLS’ customers now doing business online, 4G uptake and mobile connection have been key focal points since the deep cuts to old structure in 2011. The figures this morning looks like this re-structure is taking hold.

TLS added 1.3 million mobile users this year, taking the total connected customers to TLS’ system to 15.1 million, as users increase internet touch points with not just one stgice, but two or three. The lucrative bundle plans increased by 238,000, taking the total customers to 1.6 million users.

However, the most important figure for TLS guidance was going to be its 4G build. TLS is reporting that since its launch, 2.8 million users have now be added; this figure will build further this coming year as TLS plans to lay out 15% of sales revenue to continue to build this network.

With more and more customers looking for internet touch points through mobile stgices, TLS’ commitment to wireless over cable looks like a bet for a winning side, and we would expect mobile users to be a key drive for the coming year.  

As the uptake of higher speed internet and mobile stgices increase, the company’s FY 14 guidance is expected to increase. However, TLS does have a market saturation issue which sees FY14 EBIT once more in low single-digit growth category, and with mobile earnings slightly more volatile than fixed line, the return to ‘normal’ dividend practices may spook investors off.

However, the fact the payout ratio was slightly lower than previous year, upside surprise may be in order at the start of next year. TLS has been a darling stock for the last two and half years, as steady earnings and income have seen investors flocking to the communication giant. Today’s product figures coupled with the slight beat on earnings look like justification for this darling label.