Telstra under siege
Recommendation
Telstra's share price has fallen about 12% over the past week and now sits at our buy price of $4.
This is not, however, without reason. TPG Telecom's entry into mobile has brought to attention a phenomenon we have long warned about: Telstra's mobile business, which generates some of the fattest margins in the world, is over-earning.
A ferocious competitor like TPG is one catalyst for lower mobile margins. Another is the pending decision of the ACCC which, by months' end, will rule on whether to force Telstra to grant competitors access to its coveted regional network. Doing so would be disastrous for Telstra and is, in our view, a chief reason for the share price fall.
Telstra now appears cheap on the bare numbers – it trades on an enterprise value to earnings before interest, tax, depreciation and amortisation ratio of less than 7 and a grossed up dividend yield of over 10% – but that cheapness comes with warts.
We're currently working on a review of TPG and will update on Telstra after that. Until then we're comfortable sticking with HOLD, but we're removing our price guide to avoid any confusion.