Shareholders in Telstra Corporation Ltd (ASX: TLS) will be glad to see the back of 2017 with the share price of Australia's largest telco crashing by around a third in value this year.
But every dog has its day and those looking to buy this high-yield stock will take heart from the latest report from Morgans on the sector following the reviews by the Australian Communications and Media Authority (ACMA) and the Australian Competition and Consumer Commission (ACCC) on the sector.
The broker believes the report will pave the way for a recovery in investor sentiment towards the sector, which has been the worst performer this year and the only sector that is on track to finish 2017 in the red.
Telstra isn't the only dog in this space. TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC) have also seen considerable destruction of shareholder wealth with both stocks down 17% and 43%, respectively.
But there could be light at the end of the tunnel – particularly for Telstra. The key findings from the ACMA and ACCC reviews acknowledged that the NBN is not commercially sound, recommended against the government taxing competing wireless technologies to fund the NBN, and suggested greater spectrum sharing.
This could lead to lower NBN usage payments, which will be a significant win for our listed telcos given that their margins have been under intense pressure from the cost of putting their customers on the NBN.
The reviews have prompted Morgans to lift its recommended weighting to the sector from "underweight" to "neutral" and it highlights Telstra as the best investment opportunity in this space even though TPG Telecom stands to benefit the most from any reduction from NBN prices.
However, this could still be a few years off and that is why Morgans prefers Telstra as the market leader receives payment from the NBN for giving up its copper network, and that will go a long way to protecting Telstra in the short-term.
"Telstra is our key large cap telco pick. The investment market appears to be reacting positively to the possibility of lower NBN access changes for TPG Telecom, but does not appear to be factoring this in for Telstra," said Morgans.
"Possibly this relates to uncertainty over potential spectrum sharing requirement in a 5G world."
Telstra is trading on a net yield of just over 6% and if you factor in franking, the yield jumps to nearly 9%. Morgans has an "add" recommendation on the stock with a price target of $4.15.
In contrast, the broker has a "reduce" and "hold" call on TPG Telecom and Vocus Group, respectively.
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