Telstra Corporation – Tough luck if you want to phone a friend

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
28 May 2018, 8:19 AM
Sectors Covered:
Telecommunications, Technology and Financial Services

What happened

This week TPG released details of their planned mobile network and Telstra (TLS) investors should be pleased to discover that TPG's mobile nework will begin life as a data only network (no voice calls allowed initially).

We've consistently argued that TPG's mobile offering is not primarily directed at hurting Telstra's mobile network, rather it is directed at:

  1. bypassing the NBN's last mile (FTTB with microcells) where economically feasible (as the NBN seriously damages TPG's returns); and
  2. attracting the cost conscious consumer (which will hurt Vodaphone the most).

There will be a knock-on effect for Telstra but we don't think it's as drastic as feared. In fact, if TPG's mobile network is able to damage the NBN's economics, this could be good for Telstra.

What TPG Telecom said

TPG are notoriously secretive and this is the first time meaningful details on their mobile plans have been released. In the Australian Financial Review (25th May 2018), TPG's Chief Operating Officer Craig Levy said TPG has "decided to go to data only in the beginning" and that TPG will later this year launch a $0 unlimited data plan which after 6 months becomes $9.99 per month.

TPG will target tablet owners and younger generations who are data hungry and prefer social media applications rather than actually talking. This part of the market is serviced mostly by Vodaphone, Kogan and Amaysim (not Telstra).

What this means

In our view the fact that TPG's mobile network commences life as data only (no voice calls allowed) is an indication that the quality of the network (at least initially) will not be high. This is fine for some consumers and TPG has always targeted the cost conscious consumer. Roughly speaking one in four consumers care more about a cheap price than quality of service. Importantly, by definition, this means that the primary target market of TPG mobile is not Telstra.

Telstra, by contrast, targets the consumer that cares more about quality of service over price.

Investment view

Our positive investment thesis is based on a pessimistic valuation, attractive fundamentals, the probability that (in our view) the NBN is forced to lower prices, and our assertion that TPG's mobile network isn't as negative for Telstra as feared. A potential catalyst is the Telstra investor briefing on 20 June 2018, where they will talk about strategies they are implementing to address market pressures.

Our valuation and share price target remain unchanged. We retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Telstra Corporation (TLS). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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.

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