Competition Intensifies For Telstra

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

-Mobile earnings slowing
-Growth drivers needed
-Defensive appeal?
 

By Eva Brocklehurst

Competition remains fierce and shows no signs of abating for Telstra ((TLS)). First half results signalled a slowing in retail services revenue in mobile, with earnings up just 0.8%. Top line growth was firm, with most divisions achieving on expectations, but there was a step-up in costs which led to a miss of some broker estimates at the profit line.

The company's decision to re-base mobile plans is, Macquarie maintains, a better outcome than shifting to structurally higher value plans, or losing subscribers to competitors. Nonetheless, the changes in plans make it difficult to obtain clarity on any structural changes in the base.

Delivery of new growth drivers and more meaningful mobile growth is becoming more important, the broker asserts. Competitors are hanging in the market and getting stronger. Macquarie envisages scope for pressure to mount for mobile revenues.

The slowdown in momentum in post-paid mobile subscriptions is evident and an issue for Morgan Stanley too. The broker also remains concerned about Telstra's intentions regarding capital allocation and the lack development in the Philippines venture proposal.

Growth in fixed data and other revenue streams, such as IP (intellectual protocol) and NAS (network application services), should enable the company to achieve low single digit earnings growth for the next two years, despite a lack of growth in mobile revenue, Deutsche Bank maintains.

Accelerating NBN (national broadband network) disconnection payments should also further strengthen the company's capital position. Deutsche Bank retains a Hold rating based on a low total shareholder return.

Macquarie is more inclined to the view that the core business is also in decline. Excluding NBN payments and the acquired Pacnet revenues, earnings fell 1.9% in the half year. Aggregate costs from new business ventures are becoming material, in the broker's view.

Macquarie notes management flagged the prospect of further share buy-backs and assumes $5.2bn in cumulative buy-backs out to FY20. Furthermore, the broker note the dividend yield has contracted to around 100 basis points below that of the banks, which it believes encapsulates the broader macro concerns.

UBS upgrades to Neutral from Sell on valuation grounds, despite lingering concerns over the moderating operating outlook. Rising competition is occurring across mobile, fixed broadband, data and IP, in the broker's opinion. Moreover, the company faces a future earnings hole from the loss of high margin copper revenues and it remains to be seen whether Telstra can fill the void with new growth initiatives.

Despite the competition, Morgans suggests Telstra's ability to continue growing its subscriber base in fixed broadband illustrates the company's offering is competitive. Net additions accelerated to levels not seen for a number of years. Telstra accounts, in the broker's estimates, for 42% of the NBN activated households, above its metro market share. Furthermore, 78% of NBN subscriptions were bundled, which proves to Morgans the company is adding value.

Morgans maintains that its contrarian view is largely based on the fact that while competition has intensified it is not heavily based on price and Telstra's contracted subscriber volumes will take several years to be affected. The share price has also declined from its highs and so is factoring in negative news.

The broker likes the defensive earnings, under-geared balance sheet, short-term acceleration in cash-flow from the NBN and a growing dividend. Given the highly volatile market this appeal underscores the broker's Add rating.

Credit Suisse is at the other end of the spectrum. The broker expect mobile trends to deteriorate further in the near term, forecasting earnings to decline 1.7% in FY16 and 2.4% in FY17.

Fixed broadband was the highlight of the result, and the broker acknowledges Telstra appears to be having success in this area. Nonetheless cost pressures are expected to increase as the NBN roll-out accelerates. Overall, the earnings risk is to the downside in the broker's view and an Underperform rating is in place.

The consensus target on FNArena's database is $5.50, suggesting 1.9% upside to the last share price. Telstra has one Buy rating (Morgans), six Hold and one Sell (Credit Suisse). The dividend yield on FY16 and FY17 forecasts is 5.9% and 6.0% respectively.
 

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