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Why Macquarie Group Ltd just axed its Telstra Corporation Ltd share price target

Credit: Telstra

The analysts at investment bank Macquarie Group Ltd (ASX: MQG) were probably working late last night to come up with a revised valuation for under pressure telco Telstra Corporation Ltd (ASX: TLS).

The telco sector slumped yesterday on the back of news that Australia’s second-largest telco business in TPG Telecom Ltd (ASX: TPM) is to invest around $1.9 billion into building its own mobile network to offer to Australian consumers.

That news sent the Telstra share price some 7.5% lower to $4.22 as investors worried about the potential for a budget mobile offering from TPG to take market share from Telstra’s dominant mobile business.

Telstra’s mobile business contributed $2.06 billion in EBITDA for the six-month period ending December 31 2016 which was around half of total EBITDA. Alongside its network or new technologies services division, Telstra’s mobile division is its big growth driver and a reversal in its performance could savage its operating cash flows and ability to maintain its dividend payments.

In response to the concerns around increased competition for Telstra the analysts at Macquarie now reportedly value its shares at just $4.50.

Notably, the analysts also flagged the potential for more downside risk to its valuation if the ACCC decides to open up mobile roaming markets to more competition in a decision it is due to hand down later this month.

This morning the Telstra share price has fallen another 1% to $4.16 which means it offers a trailing yield of 7.4% plus the tax effective benefits of franking credits.

There’s no doubt that will appeal to many income investors and in my opinion the share price is now starting to come into the territory where it may offer reasonable total returns to investors over the years ahead even if it is forced to trim its dividend in financial year 2018.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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