ACCC Filip For Telstra’s Mobile Dominance

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Australia's competition regulator, the ACCC, does not intend to mandate roaming on Telstra's regional mobile network, which brokers conclude is unequivocally positive for its mobile business.

-Unlikely to have to offer competitors access to its mobile network
-Benefits could be tempered by substantial regional capital investment
-Decision likely to colour Telstra's capital management review
 

By Eva Brocklehurst

The ACCC does not intend to mandate roaming on Telstra's ((TLS)) regional mobile network and brokers conclude this is unequivocally positive for its mobile business. A final decision is due mid year. Brokers envisage the draft decision is a big positive for Telstra, as mobile is one of its competitive advantages. The draft decision suggests it will be very unlikely that Telstra will be forced to offer competitors access to its network in areas where these competitors have no mobile coverage.

The main positive, Morgans believes, is that the company can continue to invest in a superior mobile network without having to share this with competitors. Telstra has stated it has invested over $8bn in its mobile network over the last 10 years and around 15% of this is for coverage of the last 2% of the population.

The broker anticipates that Telstra may end up in a stronger position than many expect, post NBN. Morgans also believes the dividend is maintainable for the next four years and a key short-term downside risk has been removed with the draft decision.

The Decision

The ACCC's draft decision declared that it would not promote economically efficient investment in infrastructure more generally if roaming was mandated. The regulator stated there is insufficient evidence to suggest that declaring a mobile roaming service in regional and rural areas would further lower prices or improve services. The ACCC is seeking comment on other regulatory and policy measures which could improve coverage and competitive outcomes.

The draft decision is positive for the company's dominant regional market share and its premium average revenue per unit although, on the other hand, UBS believes the benefits of free cash flow will be tempered by substantial regional capital investment. Judging by the price reaction, the broker believes the market may simply be valuing the stock on the dividend yield.

Macquarie highlights the aspect that would have hurt Telstra, should it have had to share its superior network coverage, was the impact on the premium it can charge customers. Hence, the outcome is clearly positive. Telstra still faces challenges from broad-based competition across key products and the impact of the NBN rolling out and the broker believes the next catalyst will likely be an update on the capital management review.

Capital Management

Ord Minnett expects Telstra shares will trade higher and this is likely the key piece of news that management was waiting for, in terms of its capital management review. The broker also expects management will wait to conclude its review until the ACCC's final decision is made, but could make an announcement as early as the FY17 results in August.

The broker currently anticipates the company will sustain dividend payments and initiate a large buy-back program over the next few years, as an estimated $8.5bn of non-recurring NBN payments are expected over the next four years.

Citi believes the Australian mobile market will experience margin compression, as competitive intensity increases. The broker expects Telstra's mobile margins to compress to 36%, from 41% currently, over over the next five years, as Australia moves to be a four-player market from a three-player market. Mobile roaming would have accelerated this decline, in the broker's opinion.

Competitor, TPG Telecom ((TPM)), Ord Minnett believes, will struggle to get any traction on its mobile initiative without wholesale roaming and its mobile ambitions in Australia and Singapore are expected to exacerbate the margin pressures from the NBN migration over the next 2-3 years.

UBS is more moderate in its view, considering the decision only an incremental negative for TPG as, in practice, there would have been limitations to the extent it could have utilised Telstra's towers for roaming. The broker's analysis supports expectations for TPG to achieve around 7.5% long-term market share of the mobile market.

UBS also observes that the ACCC has been provided with evidence that with TPG's acquisition of spectrum for the mobile market, there are incentives for new entrants. The broker suspects Vodafone would have been the operator to benefit most from the declaration of regional roaming.

There are two Buy recommendations, three Hold and three Sell for Telstra on FNArena's database. The consensus target is $4.49, signalling 3.1% upside to the last share price. Targets range from $4.00 (Citi) to $5.00 (Ord Minnett). The dividend yield on FY17 and FY18 forecasts is 7.1%.

See also, Telstra Under Threat From TPG on April 18, 2017.
 

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