Telstra Asserts Its Strength In Mobile

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

-Will competitors become more aggressive?
-Revenue up but subscriber growth slows
-Potential to squeeze up dividend?
-UBS suggests acquisitions more likely

 

By Eva Brocklehurst

It is evident to brokers from Telstra's ((TLS)) latest briefing on its mobile business that subscriber growth is slowing but opinion diverges on the strength of the various growth drivers on offer.

JP Morgan believes the update was designed to reassure investors that the company's lead in the mobile network was strong enough to hold share and margin, while tilting the focus to industry growth rather than market share. The broker senses an attempt to wean investors off the view, one that JP Morgan shares, that the lop-sided industry structure could force competitors towards more aggressive tactics. Hence, the broker reserves judgment on some of the growth drivers. Mobile broadband is a key plank in Telstra's growth story but JP Morgan believes the pricing power bestowed by Telstra's leadership in the network is yet to be tested by competitor responses, and assumes mobile earnings will flatten in the next few years.

Deutsche Bank shares concerns about the company's capacity to fully offset rising competition and slowing subscriber growth with data and M2M (machine to machine), which is currently difficult to monetise. The broker believes long-term mobile growth is constrained to 0-2%, which will drag on the company's overall growth. A Hold rating is retained.

Three key trends were highlighted for BA-Merrill Lynch. Revenue growth is set to accelerate as average revenue per unit (ARPU) turns positive and subscriber growth slows. Margins are expanding on the back of lower subsidies and increasing use of low-cost channels and more efficient networks. Furthermore, there is the upcoming launch of 700MHz to widen the network quality gap. Mobile makes up half of Telstra's equity value now and the broker reiterates a Buy rating. Mobile post-paid is now at an inflection point, in Merrills' view, as the negatives from international roaming charges and over-use pricing are cycled and underlying demand applies upward pressure.

Credit Suisse echoes this positive view on the company's mobile network. The broker notes strong market share gains are coming to a natural end as subscriber growth slows but ARPU is picking up because of strong growth in data usage and relatively stable pricing. The flows are sufficient to achieve expected mobile revenue growth of 5.9% in the second half of FY14. The broker also hails the strong brand and network position and expects margins to improve as costs come down.

CIMB's focus is on the value add and service quality momentum. The broker thinks Telstra has good growth potential in the long term from data, devices and M2M. CIMB forecasts a 14.5c final dividend for FY14, making 29c for the full year. The strong mobile-driven cash flow also allows room for a further 1c, fully franked, although the broker is mindful that payment depends on the board's comfort that dividends can be maintained at the higher level. Macquarie balances out the revenue implications from slower subscriber momentum, attributed to a maturing of the market, with positive ARPU impacts. The margin outlook appears healthy in mobile and the broker notes increased scale, with Telstra looking to stimulate growth via tablets for the enterprise market.

UBS thinks Telstra is expensive on every measure. Mobile industry growth is slowing at the same time that price/value base competition is picking up. The broker expects outbound mobile services revenue to grow 7% in FY14 but then slow to 5% in FY15 and again to 3% in FY16-18. Capital management and acquisition options may be hovering but to UBS the latter looks the most likely. A buy-back is less than 0.5% accretive to earnings at current prices and there is a lack of franking credits to fund a special distribution.

On FNArena's database Telstra has three Buy ratings, three Hold and one Sell (UBS). The consensus target is $5.25, suggesting 1.2% downside to the last share price. The dividend yield on FY14 and FY15 forecasts is 5.5% and 5.8% respectively. 
 

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