The next generation (5G) seems likely to be a new chapter
Telstra Corporation (TLS) hosted an investor day on Wednesday (5th December). Operating conditions sound broadly similar to 2H18 and FY19 guidance was reiterated.
The day was largely an educational session that delved into the technicalities of 5G. Most of these details weren't new to us, and earlier in the year we published a report titled "What you need to know about 5G" (Morgans clients can login to view).
CEO Andy Penn, and a few of our industry contacts, have said that 5G could be the circuit breaker that resets mobile price wars. Today everyone operates a 4G network, and while TLS provides a superior network, it's harder to differentiate on quality of service when everyone is selling a broadly similar service. 5G could reset pricing as the different telcos will sell different 5G services.
The top three priorities for consumers when picking a carrier tend to be:
- reliability (aka Quality of Service or QoS);
- throughput (speed and volume); and
QoS and throughput tend to be a top priority nearly 60% of the time and this will play to Telstra's strength when consumers start focusing on 5G services.
Telstra has already done a lot of the 5G heavy lifting
A large portion of 5G capex has been incurred by TLS in FY18 and FY19 so there is not another large capex spend to come. Capex in fact, as a percentage of revenue, is expected to drop in a few years. Capex is currently elevated due to A$3bn of "strategic capex" which is partly transformation program and partly 5G spend. Both are about simplification and automation to improve the cost base and this is a critical part of 5G.
Catalysts for a re-rating
The Telstra share price remains under pressure as investors struggle to understand how the business looks in the medium term. This will take time to unfold and hinges on delivery of the T22 program. That said, there are a number of catalysts which could see the stock re-rate. Foremost, this relates to pricing pressure easing. NBN pricing has stabilised over the last six months but mobile pricing remains under pressure. We expect mobile ARPU pressure to reset in CY19 due to the likely merger of TPG and Vodafone and 5G differentiation.
Optically splitting Retail and InfraCo could allow a re-rate as infrastructure earnings are often valued twice as highly as retail (valuations could increase by approximately A$1).
Our forecasts, valuation and share price target remain unchanged (Morgans clients can login to view). We see Telstra Corporaton (TLS) as a relative safe haven in volatile equity markets. We see upside risk to the share price once the market gains comfort with what sustainable EBITDA is. Downside risk relate to management's ability to articulate sustainable EBITDA and deliver the cost out steps required to get there. There is a risk that the competitive environment worsens, but we think CY19 is peak competition and pessimism for TLS.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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