5G Focus

Ord Minnett Research Insight: TLS 

With the National Broadband Network (NBN) rollout affecting fixed margins, the mobile retail sector is now the most important earnings driver for Telstra.

Ord Minnett’s in-depth assessment of the market suggests both Telstra and its rival TPG Telecom’s (TPG, Hold) Vodafone will lose share of the prepaid market to mobile virtual network operators. In the more lucrative postpaid market, however, we believe Telstra is better placed given its head start in the rollout of 5G infrastructure. Additionally, product bifurcation through the establishment of sub-brands (such as Telstra’s Belong) should protect higher-quality services from further price degradation.

There remain headwinds in the company’s fixed broadband business, although the NBN rollout is almost completed and management is looking to increase margins to mid-teens through cost-reduction programs.

We have incorporated our subscriber estimates into our Telstra model based on our analysis of the Australian mobile market. We have also included additional capital expenditure for the purchase of spectrum at this year’s auctions, and some other minor adjustments.

Our near-term earnings forecasts remain broadly unchanged, while we are currently at the bottom of Telstra’s medium-term operating earnings (EBITDA) target of $7.5–8.5bn by FY23. This implies potential upside to our valuation should management achieve its cost-reduction targets in fixed broadband. Our net present value estimate has increased 8%, leading us to increase our target price to $4.05 from $3.75.

Telstra is offering good subscriber growth, a strong brand associated with high-quality cellular service, and an attractive valuation. With the shares trading substantially below our revised target price, we have upgraded our recommendation on Telstra to Buy from Accumulate. Key catalysts for the stock include cost savings in fixed broadband and ongoing gains in mobile subscribers, noting this segment contributes more than 50% of forecast EBITDA.