Mobile revenue key to telco's dream run
Telstra is enjoying its darling status as one of the best performing blue-chip stocks on the ASX. Last year was a big year for the telco. From long-time underachiever, its shares have since outperformed relative to the market, up 35 per cent for the year, outpacing a 16 per cent lift in the S&P/ASX200 index. Telstra now trades at a premium relative to other high-yielding stocks and major global tele rivals such as France Telecom, Deutsche Telekom and Vodafone.
The telco's performance looks even more impressive over nearly two years - its shares hit a historical low of $2.56 in mid-November 2010, but on Friday closed at $4.65, an increase of 82 per cent for those who caught the stock at the bottom.
Investors are not only attracted to Telstra's impressive gain in share price but also its steady flow of dividends, which stands at 28¢ now. If you buy at $4.65, it gives you a fully franked yield of about 6 per cent, slightly ahead of a bank deposit rate. If the Reserve Bank decides to cut official cash rates in the coming months, then the yield looks even more compelling.
Some market analysts are saying that many are buying Telstra shares not because of its fundamental values but as a proxy high-yielding bond. A volatile equity market and a declining interest rate environment certainly play to its favour.
The big question for investors is whether Telstra can enjoy another year of good run when there are some lingering doubts about its mobile revenue in a slowing market and political uncertainty over NBN, which is expected to pay $11 billion to Telstra for shutting down its copper network.
After years of incredible growth in the mobile market, the industry is entering a slow growth phase and it will have an impact on Telstra's mobile take, which accounts for more than one-third of its revenue.
Analysts still expect Telstra's mobile business to grow, albeit at a considerably slower pace, and some estimate it to be about 5 per cent.
Telstra's once dominant and lucrative fixed line business is undergoing significant pressure as people opt for mobile communication.
A wildcard for Telstra's fortune this year is the federal election in September. Under the current lucrative agreement signed between the government and Telstra, NBN is expected to pay as much as $20 billion to the telco.
However, that river of gold could be threatened should the electorate put the Coalition into government. Most analysts rate this as one of the most significant "downside risks" for the company's financial well-being.
"Whilst there is greater certainty around NBN payments, Telstra still faces risks relating to the Coalition broadband policy and payments in case of a change in government in the September 13 election," said the Deutsche Bank analyst Vikas Gour.
Another risk weighing on Telstra is the spectrum auction. Canberra is selling prized spectrum bandwidth at 720 Mhz, which is used widely for super-fast 4G network. Telcos have complained bitterly about the high reserve price.
Alice Bennett, an analyst from the Commonwealth Bank's global markets research section, says the high cost of spectrum, which she estimates to be $2.6 billion, will impact on Telstra's cash flow.
It was "difficult for us to see how Telstra can achieve a fair return on the huge financial 2013 spectrum costs forecast," Ms Bennett said.
Telstra will issue its half-yearly result on Thursday and Gour expects its revenue and earnings before interest, tax, depreciation and amortisation to increase by 1.9 per cent and 2.8 per cent respectively, roughly in line with the company's guidance.
Deutsche Bank expects Telstra to add another 779,000 mobile subscribers and further cement its position as the country's leading mobile carrier with about 50 per cent of the market share. However, the growth in mobile revenue, which contributed $8.9 billion to its coffers last year, is expected to decline from 10.1 per cent to 5.3 per cent.
Telstra is steaming ahead of its competitors and enjoys a significant first mover advantage in the rollout of its super-fast 4G network, while Optus is playing a catch-up game and Vodafone is still busily repairing its damaged brand.
One of the key aims for Telstra this year is to boost profits from the traffic over its network, especially when there are close to 1 million mobile subscribers using its 4G network. The theory here is consumers are more likely to consume more data due to the network's higher speed over rivals.
Even with Telstra's shares looking expensive relative to some global rivals and even other blue chip stocks in Australia, this premium rating could be justified, the Citigroup analyst Justin Diddams said.
"We find Telstra is trading at the upper end of valuations relative to local yield stocks and at the top end of global telecom peers on these measures. In short, Telstra is trading at a premium valuation, but one could argue this is justified given the earnings growth and yield," he said.
Frequently Asked Questions about this Article…
Telstra currently pays a 28¢ dividend and, at a share price of $4.65, that equates to a fully franked yield of about 6%. The article notes that yield is slightly ahead of typical term deposit rates and would look even more attractive if the Reserve Bank cuts official cash rates. However, some investors are buying Telstra as a high‑yield proxy rather than purely for fundamentals, and there are company‑specific risks to consider.
Telstra has been one of the best performing blue‑chip stocks on the ASX: up about 35% over the past year versus a 16% lift in the S&P/ASX200. Over nearly two years the stock recovered from a mid‑November 2010 low of $2.56 to close at $4.65 (an 82% increase from that bottom).
Mobile revenue is very important to Telstra — it accounts for more than one‑third of the company's revenue and contributed about $8.9 billion last year. Analysts cited in the article expect mobile revenue growth to slow (from around 10.1% to roughly 5.3%), so mobile performance will materially affect Telstra's results.
The article highlights that NBN payments are a major factor for Telstra: one figure mentioned is $11 billion for shutting down the copper network, while under the 'current lucrative agreement' analysts say NBN payments could be as high as $20 billion. Those payments are a significant potential upside, but political change at the federal election could threaten that river of revenue.
Yes — the 720 MHz band being sold by Canberra is prized for fast 4G networks, and telcos have complained about high reserve prices. Commonwealth Bank analyst Alice Bennett estimates the spectrum cost could be around $2.6 billion, and she says that high cost would impact Telstra's cash flow and make it harder to earn a fair return on the 2013 spectrum outlay.
The article states Telstra trades at a premium relative to other high‑yield Australian stocks and major global telecom peers such as France Telecom, Deutsche Telekom and Vodafone. Citigroup analyst Justin Diddams notes Telstra sits at the upper end of valuations, but argues that premium could be justified by the company's earnings growth and yield.
Deutsche Bank analyst Vikas Gour expects Telstra's half‑year revenue and EBITDA to increase by about 1.9% and 2.8% respectively, roughly in line with company guidance. Deutsche Bank also forecasts Telstra will add roughly 779,000 mobile subscribers and maintain about a 50% share of the mobile market.
Telstra has a first‑mover advantage in rolling out its 4G network, giving it a lead over Optus and Vodafone. The company aims to boost profits from higher traffic as faster 4G speeds encourage greater data consumption — the article notes close to 1 million mobile subscribers were using Telstra's 4G network, which supports this monetisation strategy.
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