Telstra ($TLS.AX) is Australia’s largest telecommunications company. $TLS.AX is listed on the ASX and NZX exchanges. The current share price is A$3.71 – the 52-week range has been A$4.95 to A$3.36. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $TLS.AX with interactive assumptions

Valuecruncher produces a valuation of A$3.57 for $TLS.AX. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 3.8% below the current share price of A$3.71. All of the figures below are in Australian dollars (A$).

Assumptions

• Revenue: Reuters aggregates 10 analysts covering $TLS.AX and the mean estimates of 2009 and 2010 revenues are A$25.5 billion and A$26.1 billion respectively. For our analysis we have used A$25.25 billion in 2009, A$26.0 billion in 2010 and A$26.5 billion in 2011.
• Profitability: We have used an EBITDA margin of 41.5% flat to 2011. Reuters has $TLS.AX‘s EBITD margin at 41.7% last year and averaging 43.9% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of A$4.5 billion in 2009 then A$4.0 billion in 2010 and 2011 then A$4.5 billion per annum moving forward.
• Discount Rate: 9.0%.
• Terminal Growth Rate: 1.0%.

Our analysis incorporates the cash and debt on the $TLS.AX balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher’s mid-point valuation of Telstra Corporation is $4.03 per share with a range between $3.18 and $4.95. The current share price is $4.24.

Key Assumptions

Revenue Growth

Revenue growth has been fluctuating for Telstra due to a 5-year restructuring plan that is currently taking place. Growth rates for the last three periods have been -1.55% (03/04 period), 5.46% (04/05 period) and 2.93% (05/06 period). Telstra expects revenue to grow by 2-2.5% in the next financial period. We have forecasted growth rates of 2%, 2.5%, and 3% for the next three periods, slowly climbing towards terminal growth of 3%.

EBIT Margin

Telstra’s EBIT margins have recently declined from 31% in 2004 and 2005 to 24% in 2006. This is attributed to the movement of the business into newer low-margin products as a result in technological development. Telstra have forecasted EBIT to rise by 2-4% in 2007, corresponding to EBIT margins between 23.8-24.3%. We have forecasted margins to remain at 24% in 2007 and to further decrease to 22% and 20% in 2008 and 2009.

Discount Rate

The discount rate applied is 10% (following the discount rate presented in the ‘Financial Performance & Performance Analysis’ document that Telstra have released.

Terminal Growth

Terminal growth is assumed to be 3%.

Telstra Corporation Valuation