Top 4 ASX telecom stocks: the coronavirus impact examined

‘There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen,’ once warned Warren Buffett.

A flight to defence?

Some of Australia’s top telecommunications stocks have held up remarkably well in the face of the growing economic, social and health uncertainty entailed by the coronavirus (Covid-19) crisis.

In saying that, though telecom stocks may boast more defensive qualities than those in other sectors, as the below table illustrates – the inherent risk of equities should not be understated – with some of the ASX’s top telco stocks coming under strong selling pressure in the last month.

Company

Share Price

Market Cap

1-Month Performance

Telstra Corporation

$3.07

$38.89bn

-18.32%

TPG Telecom

$7.20

$6.49bn

-11.11%

Vocus Group

$2.260

$1.32bn

-37.40%

NextDC

$7.190

$2.52bn

-8.99%

Even when considering those price declines, a recent piece of market research put forward by the investment bank JP Morgan argues that due to the essential nature of telecommunications services, the sector 'will be the last expenditure that at-risk households and SMBs cut from their spending, particularly as most of Australia likely goes into self-isolation and spends most of their time at home over the next few months.'

In terms of preference, Telstra Corporation is most favoured by JP Morgan, commanding an Overweight rating and a 12-month price target of $4.25 per share; NextDC is second on the list, with a Neutral rating and a price target of $8.25 per share; while TPG Telecom and Vocus Group are the least favoured of the pack – due in part to their exposure to a less premium customer base – both carrying Neutral ratings and price targets of $8.25 and $4.00 per share, respectively.

How to trade Australia’s telecom sector

Not interested in trading individual telecommunications stocks but still have a view on the sector as a whole? You can use IG’s world-class trading platform to trade a variety of indices – both long or short – today.

For example, to buy (long) or sell (short) the ASX 200 Communications Services Index, using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘Australia 200 Communications’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

Telstra, TPG, Vocus and NextDC share prices: the outlook amid the chaos

All up, Telstra remains JP Morgan’s preferred Australian telecommunications pick, due to its strong balance sheet, impressive cash generative ability and its premium customer base.

Centrally, one of the main reasons that Telstra remains so well positioned in this current environment is due to the high quality of its customer base. Specifically, JP Morgan notes that around a third of the telco’s revenues are derived from customers on the ‘premium end of the spectrum’, a fact that gives the investment bank faith that TLS’s revenues won’t ‘be affected much by the current environment.'

Finally, while the investment bank does note that Telstra has approximately $1.9 billion worth of dividend payments and $2.8 billion debt set to mature over the next year, the telco’s estimated free cash flow (which JP pegs at ~$5.0 billion) more than covers both of these commitments.

Secondly, NextDC, though moderately leveraged, is still well positioned to weather the next 12-months, according to JP Morgan. Overall, the investment bank doesn't see much risk to NextDC's revenues over the next 12-months, 'due to the contracted and recurring nature of its business, with customers consisting of enterprise, telecom, gov't and global IT companies.'

Thirdly, like Telstra, TPG Telecom's cash generative ability puts the telco in a strong position to weather the next 12-months of volatility; with a loan facility of $669 million also available should the telco need additional capital. However, unlike Telstra, JP Morgan notes that there is some 'earnings risk' here, given that TPG's customers are at the lower end of the premium spectrum.

Lastly, Vocus faces a similar issue to TPG – with approximately 25% to 30% of its earnings being derived from customers at the lower end of the premium spectrum.

Even though such customers pose an earnings risk, JP Morgan notes the other ~70% to ~75% of the telco’s profits provide some insulation, given that they are sourced from the government, enterprise and wholesale sectors.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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