The Telstra Corporation Ltd (ASX: TLS) share price is weathering the COVID-19 market meltdown better than most, but the calm could be marred by another mobile plan price war.
The risks of a price war are growing now that the merger between TPG Telecom Ltd (ASX: TPM) and Vodaphone is largely fait accompli.
A return of the bruising battle between mobile operators in late 2018 will almost certainly see the Telstra share price suffer after a period of relative outperformance.
While the stock is down by around 13% since the start of the year, the S&P/ASX 200 Index (Index:^AXJO) is lagging with a 17% decline due to the pandemic.
Smaller battle
The good news is that any new mobile war is unlikely to be as value destroying as the last one, according to UBS.
The broker is witnessing increasingly evidence of mobile discounting returning but believes the discounts will be more tactical this time round as opposed to outright price cuts on plans.
The tactical discounts are those that apply when customers bundle services or when existing customers add new services.
Itching for a fight
But Vodafone may be more motivated to win greater market share due to its greater exposure to international students. The number of these students have plummeted since the global coronavirus lockdown.
This means the number three network is likely to post falling subscriber numbers while Telstra gains subs.
Vodafone may also be forced to be more aggressive due to pressure from Telstra's flanker brands. These brands sell lower cost plans under Belong and JB Hi-Fi Limited (ASX: JBH).
UBS pointed out that the flanker brands are pressuring the average revenue per user (ARPU) across the industry by more than the market realises.
Further, Vodafone is likely to feel the heat to act as its ability to grow ARPU through 5G is more limited than Telstra.
Showing restrain
"We flag that whilst the benign industry status quo suits TLS best with its c50% share, the #3 player Vodafone may be less content with its existing c20% share. We therefore expect discounting to return incrementally," said UBS.
"With industry post-tax ROICs [return on invested capital] (ex NBN migration payments) now only c4% vs c10% at FY16, MNOs [mobile network operators] simply cannot afford another downward repricing of their customer books."
Who would have thought we can count on skinner returns and the cash crunch from the COVID-19 fallout to protect Telstra shareholders!
Foolish takeaway
But this doesn't mean Telstra is out of the woods. UBS believes consensus earnings forecasts for our largest telco may be too optimistic as the market doesn't seem to be pricing in any real competition.
On the other hand, I think as long as Telstra can cover its dividend payouts, investors will be willing to tolerate a hungrier competitor.
The fact is, the number of reliable and high dividend paying ASX stocks are in short supply.
