The ASX telco sector has gone through some dramatic changes since I first started covering it as a telecommunications analyst over 25 years ago.
The Australian telco landscape has particularly changed in the past 10–15 years through a string of mergers and acquisition. The number of major telco providers has more than halved to just 5.
The other major change is that the National Broadband Network (NBN) has created a level playing field for the residential telco market. Prior to this, for several decades, Telstra Corporation Ltd (ASX: TLS) was the undisputed king, as it owned the national network.
In this article, I will briefly take you through the 4 major ASX-listed telco companies in Telstra, Vocus Group Ltd (ASX: VOC), TPG Telecom Ltd (ASX: TPM) and Macquarie Telecom Group Ltd (ASX: MAQ) and I'll share my top telco pick right now.
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Telstra
Telstra previously owned the national fixed-line network for broadband and voice. Therefore, it was able to set the price that it charged to other telcos using its network. This flowed through to high margins and high company profits.
Then came along the NBN…
Telstra's T22 strategy will help address the subsequent reduction in revenues and profitability. It will help reduce underlying fixed costs by $2.5 billion annually by the end of FY22. Telstra recently revealed that it is on track to achieve most of the goals it has in place as part of this strategy.
Telstra also hopes to grow its market share over the next 5 years on the back of its market-leading 5G offering.
Vocus Group
Vocus is a specialist fibre and network solutions provider. It mainly targets the enterprise, government, wholesale and small business markets. Vocus also has a smaller presence in the residential sector offering fixed broadband.
It has grown significantly in scale since 2015, merging with retail telco, M2 Communications. It also acquired enterprise-focused Amcom and Nextgen Networks.
Over the past few years, Vocus' retail division has struggled. This is mainly due to tight margins offered to retail-fixed broadband operators under the NBN. However, a 3-year turn-around strategy is putting Vocus back on track.
TPG Telecom
TPG saw its share price rise higher between 2011 and 2016 on the back of a series of acquisitions. This included retail telcos AAPT and iiNet. It became the second-largest fixed broadband provider after Telstra. However, due to lower retail margins for fixed broadband on the NBN, TPG has struggled in recent years.
This trend is reflected in TPG's recent financial results for 1H20. Total revenue only grew by a very modest 1% for 1Ht, while underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) declined by 6%.
However, TPG's recent merger with Vodafone positions it well to compete in the mobile market against rivals, Telstra and Optus.
Macquarie Telecom
Lesser-known Macquarie Telecom services the enterprise and government telco sectors.
Specialist telco services extend to data centres, cloud computing and cybersecurity. Macquarie Telecom has seen strong share price growth on the back of strong demand in these 3 core market segments, especially cybersecurity.
For the six months ended December 31, it delivered a 9% increase in revenue on the prior corresponding period to $131.9 million.
My top ASX telco share pick?
My top pick right now is Telstra, but only just… I believe that with NBN headwinds declining further over the next year, and the potential of a gain in mobile market sales on the back of its 5G rollout, it is well placed for growth.
Macquarie Telecom's recent growth has been impressive, but I am still unsure if it can maintain this momentum over the long term. Competition in the data centre space, in particular, continues to climb.
