Why things just got tougher for Telstra Corporation Ltd and friends in 2018

Just when you thought things couldn’t get much worse for Telstra Corporation Ltd (ASX: TLS), 2018 is now looking to be even more challenging for Australia’s largest telco and the sector.

The Australian Communications and Media Authority (ACMA) is considering stiff new penalties for telcos that fail to properly migrate customers onto the NBN next year, according to the Australian Financial Review.

The fines can be as much as $10 million in response to widespread public criticism about the poor experience on the National Broadband Network.

The new rules are yet to be properly defined but will clearly make it the responsibility of telcos like Telstra, TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC) to ensure customers are happy with the service.

Call me a cynic but this looks more like a political move to take the heat off the Turnbull government and the NBN.

I suspect the telcos have played a part in the poor user experience but the new “big stick” the ACMA is looking to wield is only pointed at the telcos.

Surely some pecuniary pressure should also be directed towards the NBN?

Should new rules come into force in 2018, you can expect more margin pressure for our telcos who are already experiencing a profit squeeze from migrating customers to the NBN.

The NBN recently changed its pricing structure to offer some relief to the industry and consumers, but I doubt telcos can bank any real savings as they will need to invest more to ensure they don’t run foul of the new rules.

The outlook for Telstra though is looking a little bleaker too with the latest survey from UBS indicating that its mobile business is under the most pressure it has been in the last two years since the survey was started.

A higher percentage of respondents said they are looking to switch to another telco, while fewer customers see network superiority as an important differentiator for Telstra.

UBS is convinced that Telstra’s mobile earnings before interest, tax, depreciation and amortisation (EBITDA) has peaked and is set to decline.

The survey findings have prompted the broker to cut its price target on Telstra to $3.60 from $3.90, although it is keeping its “neutral” recommendation on the stock.

There’s not light at the end of the tunnel for the sector in the new year, as far as I can see. I believe the sector will underperform in the first half of 2018 at least and would recommend investors remain underweight on these stocks for now.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. 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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