Shares in our largest telco is outperforming both the broader market and its peers this morning and could run higher still, according to a leading broker.
The Telstra Corporation Ltd (ASX: TLS) share price jumped 1.6% to $3.71 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.8% at the time of writing.
Other telecommunication stocks are also performing well, although not quite as well as Telstra. The TPG Telecom Ltd (ASX: TPM) share price added 1.3% to $6.86 while the Vocus Group Ltd (ASX: VOC) share price gained a similar amount to $3.06.
Why Telstra is outperforming
The TLS share price got an extra boost after UBS upgraded the stock to "buy" from "neutral" following the company's Investor Day presentation.
The broker had been contemplating questions about the outlook for the mobile market, the real impact from the NBN on retail and enterprise markets, and the size of the NBN gap/cost outs.
While UBS may have upgraded the stock, it warns investors not to expect any near-term turnaround as earnings growth will stay weak and that mobile earnings will likely fall when Telstra releases its first half results in February next year.
"On mobile, we think an ARPU [average revenue per user] recovery could be more long-dated than what investors expect," said UBS.
"It may take ~2 years to cycle past the destructive pricing environment of Jul-18 to Mar-19, and excess data drags also persist in FY21 – this suggests it may take until FY22 for ARPU's to experience strong growth."
Mobile earnings growth
But don't fret. ARPU only tells part of the story as it doesn't include reduced handset subsidies and the impact of Telstra's loyalty program. This means the mobile division's earnings before interest, tax, depreciation and amortisation (EBITDA) should start to improve well before the ARPU. UBS thinks this will happen as soon as the second half of FY20.
The broker also doesn't think the NBN issues are enough to threaten Telstra's medium-term earnings growth potential or its 16 cents a share fully-franked dividend.
Value of spin-off
But it's not all good news. Telstra's aim to spin-off its infrastructure assets may not be as value accretive as some investors might hope.
"New disclosures from TLS (delta to InfraCo earnings, book value, low tenancy ratios), coupled with overseas comps on towerco assets (Vodafone ~$25k EBITDA per tower), leads us to estimate a much smaller earnings contribution from the mobile tower assets (potentially ~$100m-$200m EBITDA contributions in our view)," said the broker.
"Which even on c20x+ EBITDA suggests tower valuations of only ~20-40cps."
UBS has a price target of $4 a share.
