Back in 2010, Telstra (TLS) dropped to a low of $2.60 due to falling margins on its fixed line network.
Subsequently the National Broadband Network (NBN) bought its fixed line assets and Telstra was then a key beneficiary of the introduction of the iPhone with its 4G network.
It seems here we are again, with Telstra’s share price trading around at $2.90 per share at the time of writing due to falling broadband margins and increasing competition in their mobile business.
So the question is: will Telstra again find a solution and fight their way back?
It will take time, however I think this will prove to the case.
With the benefit of hindsight, the best thing that Telstra could have done would be to cut its dividend so that it can reinvest these funds back into building a better business.
Since the introduction of the NBN by the government, wholesale broadband prices have doubled and are set to increase further.
So far this has been absorbed by the retail service providers, such as Telstra which is hurting their margins.
Ultimately, we believe this is unsustainable and will need to change in order to avoid higher long-term prices for customers.
We are therefore of the view that NBN prices will ultimately be lowered (post an NBN write-down).
We also point out that there are competing technologies that can help Telstra (and the other telco companies) lower last mile access costs with the most obvious of these technologies being 5G.
I also note that to be able to build a 5G network you first have to have a 4G network.
Given Telstra has the best 4G network, it puts them in the box seat for 5G.
Telstra is scheduled to hold a strategy day on June 20, where we think there is potential for the company to announce material restructuring and cost cutting initiatives.
The company has said it will talk to “additional strategies it is implementing to address market and competitive challenges, leveraging the investments already made as part of its strategic investment plan”.
We think these efforts will likely be well received.
Telstra now trades on a single digit price to earnings ratio (9.8x) and an 8 per cent yield fully franked (versus its 20 year average of 6.2 per cent).
We feel that the market pessimism in the stock is reaching a peak and therefore see further downside as being limited from current levels.
It’s had a checkered history, and it maybe boring, however for me at current prices it’s a buy.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410