Telstra
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 30 October 2015, 9:50 AM
- Sectors Covered:
- Telecommunications, Technology
We attended the Telstra (TLS) investor day yesterday (Thursday 29 October). We think the majority of the bad news is currently priced in, that the earnings outlook has stabilised, and that any potential investment in a Philippines mobile Joint Venture wouldn't be as material as feared.
Key takeaways
The key piece of new information, in our view, is that if Telstra did invest in a Joint Venture for a Philippines mobile operator their total equity commitment would be less than US$1bn and this should get the business to cashflow positive. Discussions are ongoing and Telstra has not committed either way but they have done substantial due diligence and believe the operating environment is favourable with less competition than many other regions. Telstra reminded investors that Asian expansion is the key growth focus and is necessary to offset declining fixed line earnings as NBN gains momentum. Telstra has, on the whole, operated successfully overseas for a number of decades and their Asian businesses (including recently acquired Pacnet) are tracking well.
Telstra reiterated that mobile and fixed line competition remains intense and noted Q1FY16 trends are following a similar trajectory to Q1FY15 but down slightly on a strong Q1FY15.
Australian interest rates look to be heading lower
Our Chief Economist, Michael Knox, believes higher than acceptable domestic unemployment is putting downward pressure on inflation and will force the RBA to cut interest rates further. In the September quarter core inflation was at the lower end of the RBA's target band and we expect that an out of cycle rate rise by the major banks won't help matters.
In our view, the lower for longer global interest rate environment is likely to gather steam, and has the potential to reignite interest in the defensive yielding stocks like Telstra.
Investment view - we upgrade our recommendation to Add
We have made no changes to our forecasts or valuation but, following recent share price weakness, we think the risk/reward equation now favours the upside.
Should Telstra return to its long term PE of 14x this would see the stock trading at A$5.03. A more likely scenario (in our view), is that the declining Australian interest rate environment generates renewed interest in TLS's 5.8% fully franked dividend yield and its relatively defensive earnings. The key downside risk relates to increased competition eating away at TLS's fixed and mobile market share. While increased competition has captured a lot of media attention to-date, TLS's mobile and National Broadband Network market share is tracking better than expected.
We upgrade our recommendation to Add (from Hold).
Morgans clients can access our detailed research and share price target on Telstra Corporation (TLS). If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.