Weekly Buy Recommendation: Telstra (TLS)

Telstra Corporation Limited (TLS) is a provider of telecommunications and information products and services, arguably best known as Australia’s dominant telco company.

Its principal activities are the provision of telephone lines; national local, and long distance, and international telephone calls; mobile telecommunications; data; internet and on-line; wholesale; telephone directories; and pay TV.

TLS owns a 50% stake in Foxtel while Newscorp (NWS) and Consolidated Media Holdings (CMJ) hold 25% each.

Results confirm turnaround

TLS’s 1H FY12 results showed a return to EBITDA growth after years of stagnation. EBITDA grew 3.7% to $4,750 million when compared to the $4,580 million in FY11.

Total revenue climbed by 1.1% to $12,419 million, whilst operating expenses declined 1% to $7,751 million over the same period.

One of the major earnings drivers for the company is its mobiles products; revenue was up 10.9% to $4,393 million year on year. Revenue from this product line alone makes up of one-third of TLS’ revenue.

The growth in Mobiles is impressive, especially when considering EBITDA margin of 34% was considerably higher than Optus’ 25.9% and Vodafone & Three’s 16.3%.

TLS has the only 4G network in Australia and with many new mobile phones being designed with 4G capabilities, the company can continue to experience strong growth in this market.

$11 billion NBN booty

Earlier this month TLS finalised its definitive agreements with NBN Co and the government for its participation in the NBN rollout.

The agreement will provide the company with approximately $11 billion in post-tax net present value over the long term life of the agreement.

The $11 billion includes compensation from the government for decommissioning its copper network and allowing the NBN to use some of its infrastructure.

In a strategy update on April 19^th, TLS said it expected to generate $2 – $3 billion in free cash flow over the next three years, subject to the NBN roll out schedule and market conditions.

TLS also said that it didn’t have the franking capacity to increase dividends before 2014 and that it had no immediate plans for a share buyback.

Arguably a better longer-term share price driver for a company is the implementation of a dividend increase over a buyback.

A dividend increase signals confidence in the long-term prospects of a company, and that TLS’ management has recognised this is a positive thing for shareholders.

Widening yield differential signals positive outlook

TLS is currently trading on a forecast yield (28c for FY12) of over 8.5%, fully franked. This is equivalent to 12.1% pre-tax.

TLS has been able to maintain a 28 cent per share dividend since FY07 and has forecast the same amount for FY12 and FY13.

Given the healthy sums of cash TLS is generating and following this month’s strategy update, we would anticipate a dividend increase from 2014.

When considering the next likely move in interest rates is down, we believe income-oriented investors will increasingly prefer TLS’s dividend yield over potentially lower interest rates on their savings accounts.

As such we think TLS is a stock to watch in the coming months.

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Telstra (TLS) Finalises Deal For NBN Network

Telstra Corporation Limited is a full service domestic and international telecommunications provider for Australia.

The Company provides telephone exchange lines to homes and businesses, supplying local, long distance and international telephone calls and supplying mobile telecommunications services. Telstra also provides data, internet, on-line services and directory services.

Telecommunications Stock Telstra announced that it has finalised its $11 billion agreement with the federal government and NBN co for the rollout of the National Broadband Network (NBN).

The agreement will see Telstra receive close to $11 billion over the life of the agreement, which ensures that the company’s infrastructure will be used by the NBN.

CEO David Thodey said that Telstra has concluded almost three years of intense and complex negotiations and is pleased to deliver this positive outcome for customers and shareholders.

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QBE First State Negotiations For two Bolt On Acquistions

QBE Insurance Group Limited is an insurance company which underwrites most forms of commercial and industrial insurance policies, as well as individual policies.

QBE also manages Lloyds syndicates and provides investment management services. The Company provides its services both domestically and internationally.

Financial Stock QBE Insurance announced that it is in the final stages of negations to acquire two ‘bolt on’ acquisitions.

The acquisitions are expected to contribute up to US$500 million in annual written premium to the QBE business.

The company which recently raised $450 million from an institutional capital raising said that it will pay for the acquisitions from internal resources.

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Woolworths posts 1H FY12 profit of $966.9 million

Woolworths Limited operates supermarkets, specialty and discount department stores, liquor and electronics stores throughout Australia.  Woolworths also manufactures processed foods, exports and wholesales food and offers petrol retailing.  The Company also operates hotels, which includes pubs, food, accommodation, and gaming operations.

Blue chip supermarket giant Woolworths posted a 1H FY12 profit of $966.9 million, a 16.8% fall compared to the same period in FY11. The results missed analyst expectations.

Revenue for the period was up 5% to $29.9 billion.

CEO Grant O’Brien said that the results were sound considering subdued consumer confidence and deflationary pressures faced by the business.

The company declared an interim dividend of $0.59 per share, up from $0.57 in FY11

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Westfield Group (ASX:WDC)  is the largest retail property group in the world by equity market capitalisation. It has investment interests in 126 shopping centres in Australia, New Zealand and the United States

Westfield, which is among the blue chip stocks, revealed a full year 2011 profit of $1.53 billion, a 37.5% rise on the previous corresponding period, slightly ahead of analyst expectations.

Full year revenue climbed 10.5% to $1.46 billion, year on year.

WDC declared a final distribution of 24.2 cents, in line with expectations.

The group also announced it would start an on-market buyback of securities for up to 10% of its issued capital.

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National Australia Bank (ASX:NAB) is one of Australia’s “big four” banks, with a focus on regional banking, wealth management operations, international capital markets and institutional banking business. Brands within Australia include NAB and MLC, and the group is represented in New Zealand by Bank of New Zealand. In the UK the brands are Clydesdale Bank and Yorkshire Bank.

Financials stock, National Australia Bank released its first quarter trading update which showed 1Q FY12 earnings of approximately $1.4 billion, 8% higher than the previous corresponding period.

The bank said that revenue was driven by wholesale banking and to a lesser extent, MLC and NAB wealth.

NAB also revealed that it will undertake a strategic review of its UK operations, with a view to reposition the arm to deal with the current economic situation in the region.

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Woolworths (ASX:WOW) operates supermarkets, specialty and discount department stores, liquor and electronics stores throughout Australia. Woolworths also manufactures processed foods, exports and wholesales food and offers petrol retailing.  The Company also operates hotels which includes pubs, food, accommodation, and gaming operations.

ASX Blue chip supermarket giant Woolworths today announced 2Q sales growth of 5.1% to $14.1 billion compared to the previous corresponding quarter, this was in line with market expectations.

The 2Q sales results bought the 1H FY12 sales to $29.7 billion, a 5% increase on the previous year.

WOW also announced that it will sell its Dick Smith consumer electronics business following a strategic review that was announced in November.

Since the review the company said it has received a number of unsolicited approaches in relation to Dick Smith.

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Mirabela Nickel (ASX:MBN) is a mining company focused on the production and sale of nickel concentrate.

The miner’s key asset is the Santa Rita nickel operation in Bahia, Brazil.

MBN achieved its production ramp up goals in 2011, successfully upgrading the Santa Rita’s plant capacity to 7.2Mtpa of ore milled, from 4.6Mtpa in 2010.

However the ramp up was also accompanied by rising cash costs, which detracted significantly from an otherwise solid set of December 2011 quarter production numbers.

Costly cash

Mirabela Nickel announced its December quarter production report today.

Nickel output climbed 9% from the previous quarter, helping MBN to meet its 2011 production target of 15,854 tonnes.

However the production numbers were overshadowed by a disappointing rise in cash costs.

Cash costs jumped 11% on the quarter to US$7.42, as the higher output was accompanied by higher plant costs and lower productivity.

Additionally, mining costs rose amid increased expenses relating to drilling activity.

The ramp up in quarterly production was thus poorly executed due to the company’s own efficiencies as well as industry cost pressures.

Risk on

Another concerning aspect of the production release was the almost 50% fall in MBN’s cash holdings from the prior quarter.

A significant part of that outflow was due to the closing out of the company’s nickel and copper hedges.

The lower cash balance in addition to a new US$50 million debt facility entered into by a Brazilian subsidiary, raises MBN’s risk profile in a period of economic uncertainty.

Outlook

MBN has raised its 2012 production guidance, targeting 20,000 – 22,000 tonnes of nickel output.

As mentioned, however, greater output is not necessarily a good thing when it is accompanied by higher cash costs.

Mirabela Nickel has commenced a cost reduction program, which aims to lower cash costs towards US$6/lb by the end of the year. However that is largely dependent on the proper implementation of the program.

Although a return to steady state production may help, cost reductions will also be linked to the favourable renegotiation of MBN’s major contracts.

Having recently closed out of its nickel hedges, MBN is now fully exposed to the movement in commodity prices.

Unfortunately, there is also considerable uncertainty surrounding nickel prices, with brokers Morgan Stanley and Goldman Sachs recently downgrading their forecasts amid concerns about oversupply.

We at Australian Stock Report believe these headwinds are likely to weigh on MBN’s share price for a while yet.

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Santos (ASX:STO) explores for and produces natural gas, crude oil, condensate, naphtha and liquid petroleum gas. The Company conducts major onshore and offshore petroleum exploration activities at oil and gas fields in Australia (Cooper/Eromanga Basins), the United States (Gulf of Mexico), Indonesia and Papua New Guinea. STO is Australian based and is member of S&P/ASX 200.

Santos revealed its fourth quarter production was down 9% on-year, whilst revenue was up 25% in the same period to $750 million.

The company also reported full year production down 5%, with a 14% increase of revenue to $2,530 million.

STO reaffirmed the 2012 guidance provided in November, which was a production range of 51-55 million barrels of oil.

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BHP Billiton (ASX:BHP) is an international resources company.  The Company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining.

Blue chip stock BHP, today announced that its latest quarterly iron ore output increased 22% in the December quarter compared to the previous quarter.

BHP’s operations in Western Australia’s Pilbara region recorded record production on an annualized basis, as the company expanded its infrastructure base in the area.

The Melbourne based company said that it expects full-year production to marginally exceed prior guidance of 159 million tons per annum.

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