Dialling It Up

Ord Minnett has resumed coverage of the telecommunications sector, noting that structural changes since industry restructuring are presenting investment opportunities.

 

We initiated on Vocus Communications (VOC) with a Buy recommendation and a December 2017 target price of $5.25. We see Vocus as being in the best position to benefit from acceleration in broadband adoption over the next few years, without margin pressure associated with the National Broadband Network (NBN).

 

We initiated on Telstra (TLS) with an Accumulate recommendation and a target price of $5.45. In our view, secular tailwinds from mobile migration and increasing data usage will drive growth at Telstra, although there will be headwinds in the form of NBN margin pressures.

 

We initiated on TPG Telecom (TPM) with a Hold recommendation and a target price of $6.65. TPG’s NBN pressure and mobile ambitions leave us on the sidelines at this time.

 

Mobile market – Tailwinds remain strong, with our base case assuming a three-player market. The Australian mobile market is one of the more attractive markets in the world due to the three-player dynamic and strong population growth. We expect increasing data usage and mobile device proliferation to support continued growth in the industry. There is potential for a new entrant from the 700MHz re-auction in April, but our base case assumes it remains a three-player market due to the expensive and lengthy network build with uncertain returns.

 

NBN – This network is expected to continue pressuring margins for the incumbents but creates an opportunity to invest in operators, such as Vocus, which are poised for accelerated growth over the next 4–5 years, aided by growth in data usage. New entrants could potentially pressure prices, but we expect faster speeds and higher data limits to offset pressure on pricing.

 

Vocus Communications (VOC, Buy) – Vocus is the best-positioned of the major players as recent acquisitions put the company in a strong position from a product and network perspective. With the smallest fixed-line broadband share, we expect the company to benefit from the forced churn and accelerated fixed broadband adoption, on top of steady growth from its corporate business. Vocus currently trades at 6.9 times FY18E enterprise value to operating earnings (EV/EBITDA), versus comparable multiples for TP and Telstra of 7.7 and 6.6, respectively.

 

Telstra (TLS, Accumulate) – Telstra is arguably facing the strongest headwinds in the industry, with the NBN expected to reduce EBITDA by $2–3 billion annually and the potential for mobile roaming regulations and new entrants. In our view, however, the NBN downside is already priced in and the high dividend yield and modest valuation should provide solid share price support.

 

TPG Telecom (TPM, Hold) – TPG is one of the more cost-efficient operators in the industry. However, NBN migration is expected to compress margins and new entrants could potentially pressure pricing and market share. Its mobile ambitions in Australia and Singapore are also uncertain at best. As such, we would stay on the sidelines until we see more clarity in the business.

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