Telstra takes its place in the sun
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 Telstra. From long-time underachiever, its shares have since outperformed relative to the market, up 35 per cent in 2012, outpacing a 16 per cent lift in the S&P/ASX200 index. Telstra now trades at premium relative to other high-yielding stocks and global telecommunications rivals such as France Telecom, Deutsche Telecom 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 now stands at 28¢. Investors buying at the current price of $4.65 get 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, the yield looks even more compelling.
Some analysts say many are buying Telstra shares as a proxy high-yielding bond rather than because of its fundamental value. A volatile equity market and declining interest rates certainly play to its favour.
The big question for investors is whether Telstra can enjoy another year of good run when there are lingering doubts about its mobile revenue in a slowing market and political uncertainty over the national broadband network, which is expected to pay $11 billion to Telstra to shut its copper network.
After years of incredible growth in mobile markets, the industry is entering a slow-growth phase that will affect Telstra's mobile revenue, which is responsible for more than a third of its revenue.
Analysts still expect its mobile business to grow, albeit at a considerable slower pace. Some estimate it to be about 5 per cent. Telstra's once dominant and lucrative fixed-line business is under significant pressure as people opt for mobile communications.
A wildcard for Telstra's fortune this year is the upcoming federal election. Under the lucrative agreement signed between the government and Telstra, NBN is expected to pay as much as $20 billion to the telco.
But that river of gold could be threatened should the Coalition win government come September. Most analysts rate this as one of the most significant "downside risks" for the company's financial wellbeing.
"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 14 election," says Deutsche Bank analyst Vikas Gour.
Another risk is the spectrum auction. Canberra is selling prized spectrum bandwidth at 720 Mhz, used widely for super-fast 4G network. Telcos have complained bitterly about the high reserve price.
Alice Bennett, an analyst from Commonwealth Bank's global markets research says the high cost of spectrum, which she estimates to be $2.6 billion, will affect Telstra's cash flow. "It remains difficult for us to see how Telstra can achieve a fair return on the huge financial 2013 spectrum costs forecast," Ms Bennett says.
Telstra will issue its half-yearly results on Thursday and Deutsche's Mr 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 expects Telstra to add another 779,000 mobile subscribers, further cementing its position as the country's leading mobile carrier with approximately 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 4G network, while Optus is playing a catch-up game and Vodafone is still repairing its damaged brand.
A key aim 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 that is consumers are more likely to access more data due to the network's higher speed over rivals.
Even with Telstra's shares looking expensive relative to some global rivals and other blue chip stocks in Australia, this premium rating can be justified, says Citigroup analyst Justin Diddams.
"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," he says. "In short, Telstra is trading at a premium valuation, but one could argue this is justified given the earnings growth and yield."