In Brief: Telcos, Gaming & Building Materials

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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Home grown focus on telcos offers respite from tariff turmoil, while analysts dig into trade impacts and cyclical challenges for gaming and building material companies.

-Trump tariffs shrink Canadian slot machine market
-Telcos take a bow
-Building materials, down but not out

Quote of the week comes from Tim Murray, Capital Markets Strategist, Multi-Asset Division at T. Rowe Price.

 “The growing skepticism about the U.S. earnings outlook stands in sharp contrast to an incrementally more positive environment for non-U.S. stocks, particularly in Europe. The potential combination of economic acceleration and a more supportive interest rate environment has been particularly encouraging for Europe’s banking sector, which has been out of favor with investors for much of the past two decades.”

Caught in tariffs crossfire

While markets have been shooting first (selling stocks) on tariff concerns, analysts will be increasingly looking into the weeds for those Australian companies with US exposure to determine what, if any, impacts might be forthcoming.

Jarden has conducted such an exercise into Light & Wonder ((LNW)) and Aristocrat Leisure ((ALL)), possibly not the two companies that would spring to mind with potential tariff impacts.

The broker emphasises tariffs can also result in a smaller addressable market via tariff retaliations and points to recent media reports. Canadian provinces, including Alberta’s Gaming and Liquor Commission and Lotteries and Gaming Saskatchewan, are reported as halting the purchase of US slot machines that were due to be upgraded this year.

Canada is a “meaningful” market that has been historically dominated by US-domiciled International Game Technology with a 45% market share for slots. Light & Wonder and Aristocrat are underweight in the market with respective shares of 20% and 18%.

Jarden believes both ASX-listed companies can and will “work around” as per the covid experience, given their global reach and scale of diversification. Light & Wonder noted in its 4Q 2024 trading update the potential impact of “single millions of dollars.” The stock remains Buy-rated with a $200 target price. Aristocrat carries a Hold-equivalent rating with a $67 target price.

Telco stocks leading on growth and dividends

As of December 2024, the Australian broadband market had four major players representing 80% market share, but smaller providers have been taking share away.

Aussie Broadband ((ABB)) has lifted its market share to 7.8% in the latest December data, up from 5.7% in December 2021, Wilsons details.

Superloop ((SLC)) has increased to 6.2% from 1.7% over the same period. The Challenger market share rose to 19.8% in December 2024 from 9.9% in December 2021.

Management at Superloop believes Challenger market players could achieve a collective 30% share over the longer term based on international market trends. The broker views this as achievable.

Over the second half of 2024, compared to the first half, Superloop’s NBN market share rose to 6.2% from 4%, or 152k NBN connections, while Aussie Broadband’s share fell to 7.8% from 9%, a loss of -136k connections, as the transition of Origin Energy ((ORG)) customers to Superloop progressed. The most impact of the migration transition occurred in the September quarter and was completed in October.

Adjusting for the migrations, Wilsons’ analyst points to net additions of 38k for Aussie Broadband and 37k for Superloop.

Both players have a higher proportion of customers with over 100Mbps speed plans compared to the overall NBN market at 27.6%. Superloop has a higher tendency to better consumer gross margins, as it has a higher weighting to faster speeds, and there is less price competition than the 50Mbps plan, which is popular across the market, Wilsons explains.

The three major players, Telstra Group ((TLS)), TPG Telecom ((TPG)), and Tangerine (Vocus), continue to lose market share.

Jarden has a Buy-equivalent rating on both Superloop (target price $2.50) and Aussie Broadband (target price $4.35).

FNArena’s consensus target price for Superloop stands at $2.613 with four Buy-equivalent ratings, and the consensus target price for Aussie Broadband is $4.523, also with four Buy-equivalent ratings.

Cash flow is king for major players

Turning to the incumbents, Jarden’s deep dive into cash flow concludes both Telstra and TPG can “sustainably” grow their free cash flows out to FY28.

Ex-spectrum, the broker forecasts Telstra’s free cash flow to advance to $3.654bn, or 33.2c per share, by FY28 from $2.16bn in FY24, or 18.7c per share, at a compound average growth rate of 15% per annum.

For TPG, ex-spectrum free cash flow is estimated to achieve a compound average growth rate of 22% to $865m, or 46.5c per share, in FY28 from $391m, or 21.1c per share, in FY24.

The major factors underpinning the growth in profitability and free cash flow are the maintenance of a “relatively rational mobile market”, operating cost controls, margin expansion opportunities, and limited uptick in business-as-usual capex.

Jarden believes Telstra can pay a mid-20c dividend per share by FY28 and buy back over $2.25bn from FY25-FY28.

TPG, by comparison, is challenged by its current dividend framework and requires a reset, with the intended sale of its fibre assets and fixed enterprise, government, and wholesale business to Vocus seen as a great opportunity.

A special dividend of $1.23 could be paid if the Vocus transaction completes. Both stocks carry a Buy-equivalent rating, with a target price of $4.30 for Telstra and $5.10 for TPG.

FNArena’s consensus price target for Telstra is $4.238 with three Buy-equivalent ratings, two Hold-equivalent, and one Sell rating.

TPG’s consensus target price is $4.778, with one Buy-equivalent, two Hold, and one Sell-equivalent rating. Macquarie is on research restriction.

Building materials navigating cyclical hurdles and tariff 

Post-earnings season, Goldman Sachs shines a torch on building materials companies.

After a rally of around 15% in Fletcher Building‘s ((FBU)) share price, with a concurrent downward revision in consensus FY25/FY26 earnings before interest and tax forecasts of -3%, the broker highlights the company remains “cyclically challenged”.

The stock is downgraded to Sell with a $2.85 target price.

SGH Ltd ((SGH)), the renamed Seven Group Holdings, should continue to benefit from Boral’s earnings momentum “despite a lack of macro support,” the analyst says. Through WesTrac, Coates, and now 100% owned Boral, Goldman Sachs likes the exposure to Australia’s mining, infrastructure, construction, and energy sectors. The stock remains Buy-rated with a $59.30 target price.

Reece ((REH)) has experienced a challenging share price de-rating over the last 12 months, falling -42% and down -29% over the last month. The stock remains at a higher valuation than its peers, the broker highlights, and as the recent result showed, the US opportunity is not “linear,” with the valuation offering no room for short- to medium-term negative surprises as the North American housing cycle struggles to recover.

A Sell rating is retained, and the target price is lowered by -14% to $16.80 due to a slowing growth outlook, currently set at 4% over the next four years versus 14% over the last four years.

By contrast, Goldman Sachs sees James Hardie Industries ((JHX)) and Reliance Worldwide ((RWC)) as already “priced for worse” in terms of tariff impacts, either direct or indirect, and ongoing uncertainty around the US housing cycle.

James Hardie is Buy-rated with a $59.45 target price, and Reliance is also Buy-rated with a $6 target. The broker believes the latter business is exhibiting US resilience, with UK uncertainty the key risk.

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