After four years of significant underperformance, we think the telecommunications sector has found rock bottom and is showing early signs of a rebound. There are several fundamental catalysts that could drive this recovery and they all relate to consumer fixed and mobile services, which account for more than 60 per cent of earnings.
These catalysts are due by June and include: 1) passing the peak pain point on the NBN (consumer prices are now going up for the first time ever); 2) the launch of 5G (which moves the focus from price to quality of service); and 3) the ACCC's decision on whether Vodafone and TPG Telcom can merge.
70pc of households are forecast to have transitioned to the NBN by June, rising to 75pc by December. This means we are through the bulk of the forced churn event. Perversely TLS still holds greater than 50pc market share in the NBN and after years of price-based competition, things are looking up. During February, most telecommunications sector CEOs noted the NBN is unsustainable and since then we have seen household price rises to help offset higher input costs under the NBN. This is, in our view, the first sign that things will improve from here.
We continue to rate Telstra as our preferred pick as it has NBN and 5G upside that isn't yet factored in. Telstra will be the first to market and is likely to win the 5G race in terms of customers added and pricing. In addition to extensive work done over the past few years for 5G, Telstra has the advantage of our government blocking 5G equipment from Chinese vendor Huawei. This will slow 5G rollout plans of its competitors Optus and Vodafone, who rely on Huawei and expand Telstra's competitive lead.
The key ingredients for 5G are fibre, towers (for coverage and volume), customer scale (to better share the fixed cost base) and spectrum (for the last mile). Telstra has the most fibre (~200pc more than average), the most towers (~60pc more than average) and the most customers (35pc more than average).
5G has many purported benefits but the highlights are: 1) about 10 times increase in average speeds/ throughput; 2) a lower cost to serve than NBN; 3) the ability to handle many more devices; 4) the ability to more dynamically manage networks; and 5) lower latency (much faster response times).
It was only in 2003 that mobile data became a commercial reality and since then speeds of mobile networks have moved from strength to strength. Average 3G speeds were closer to 3Mbps. 3G peak speeds stared at 10Mbps and over time edged towards 22Mbps. Average 4G speeds are around 20Mbps (about seven times faster than 3G). 4G peak speeds started at 50Mbps and over time edged towards 100Mbps. 5G speeds are unknown as 5G is mostly theoretical at this stage in Australia, however we think that average 5G speeds are likely to be around 200Mbps or about 10 times faster than 4G. Put simply, if 5G can move 10 times the volume of data over a mobile network relative to 4G, then the cost to move a Gb of data drops by a factor of 10, which is good news for consumers.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited ' ABN 49 010 669 726 ' AFSL 235410
