Telstra (ASX:TLS) ‘best placed in the Aussie mobile market’ says JP Morgan

JP Morgan has high conviction for an overweight rating on the telco giant.

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The Telstra Corporation Ltd (ASX: TLS) share price closed the session 3% down on Tuesday, and is set to open at $3.93 after a spell on Australia day.

Shares in the telco giant are a favourite in the coverage universe of investment bank JP Morgan, who are overweight on the stock with a buy rating.

The broker recently updated its modelling for Telstra following the company’s release on 13 January, although remained firm in its bullish posture in doing so.

Broker reckons Telstra is a buy

JP Morgan says that Telstra is the “best placed in the Australian mobile market” to deliver returns in 2022 from a fundamental perspective.

The company’s “headstart on the rollout of 5G infrastructure should see market share gains of lucrative postpaid subscribers” the broker says.

“Additionally, product bifurcation through the establishment of sub-brands (such as Telstra’s Belong) should protect higher-quality services from further price degradation”.

JP Morgan has Telstra as a high conviction name within its telco coverage, noting a strong growth outlook in EBITDA earnings and segment profitability for the company.

Despite its strong performance over the recent months – where it has rallied from $3.80 in November to trade as high as $4.26 in January – shares have plunged this past week, in sync with a selloff in ASX tech-weighted shares.

Still, the company has “guided to strong EBITDA growth in the medium term driven by higher profitability in Mobile and productivity gains”.

“Furthermore, there is the potential for further monetisation of assets through the much larger InfraCo business which we value at 22x or A$32 billion (100% and prior to capital gains tax)”, the broker says.

Capital inflows from asset sales and good free cash flow could “drive scope for further distributions”, leading analysts to increase the valuation on Telstra to $4.85 per share, signifying a 23% margin of safety at the open today.

The horizon isn’t risk-free however, with the company still facing challenges in its fixed broadband segment, particularly as the telco could lose market share to lower-cost substitutes.

“As the NBN rollout continues into metro regions and more well-capitalized operators sign up as NBN resellers” analysts at JP Morgan said, “Telstra could start to lose market share to new entrants that may offer much lower pricing to consumer”.

“Even if Telstra maintains a steady share of broadband subscribers, pricing pressure from new entrants such as MyRepublic, which is known for its aggressive pricing in Singapore, could lower the potential NBN offset to its ADSL and PSTN revenue losses”.

Telstra is also relying on “growth from the Mobile, GES and NAS segments as potential offsets” to alleviate pressures on margins, the broker says, which could be difficult to achieve.

Nevertheless, JP Morgan likes management’s cost reduction efforts and is constructive on the shares given current valuations, and rates it a buy.

With the stock price well below our DCF valuation, we are Overweight”.

Telstra share price snapshot

The Telstra share price has slipped 6% this year to date amid a heavy selloff in ASX shares, however has still climbed over 25% in the last 12 months.

The pressure has extended this week and shares are down over 6% in the past 5 days of trading, leading the S&P/ASX 200 Index (ASX: XJO)’s loss of 5%.

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