Telstra exits Hong Kong for a tidy price

Telstra has agreed to terms with Hong Kong billionaire Richard Li to sell its CSL mobile business to HKT for US$2.43 billion.

The deal is subject to regulatory approval, but is unlikely to find its path blocked as TLS looks to maximise shareholder returns as the sale would equate to a A$2 billion price tag from TLS’s 76% stake in CSL.

Some may question TLS’s decision to leave Hong Kong considering CSL saw a growth rate of approximately 9.8% in FY13 and 8.7% in FY12, however it’s these comments from CEO David Thodey that suggest maybe the company believes CSL has reached a critical mass: “There are a number of dynamics in the Hong Kong mobiles market that means this is the right opportunity for Telstra to maximize our return on this successful asset.”

Increased completion from mainland China providers are leading to cut price dealings and this is bound to squeeze margins in the long term. Just drawing on the inferred meaning in David Thodey’s statement, TLS believes it is selling at the top of the market before the saturated Hong Kong telecommunications market starts to come under pressure from a bottom-line perspective.      

The company stated that the deal ‘is expected to generate profit of about A$600 million for Telstra. It will add to the company’s free cash flow, which is forecast to be between A$4.8 billion to A$5.1 billion in the year ending June 30.’

This is shareholder positive as the payout ratio and fixed dividend story of the last six years looks to be assured through to even FY15. The company is still looking to Asia as a source of future growth as it ups its stake in Autohome - the Chinese automobile website listed on NYSE, its joint venture stake in two submarine fibre optic cables and a data centre in Singapore. Asia will be a future revenue source for TLS, however it may be in areas outside of the pure mobile space.

The Trade

TLS has found $5.20 a very strong resistance level and has yet to punch through it as institutional investors see this as a total return exit point. Today’s news will be positive for the share price, however I believe it will not be enough to see the $5.20 level being broken in the near term.

I would look to sell on or about $5.20 if the current uptrend in TLS breaks down; I think the current strength is more to do with whole market forces rather than stock specifics, and therefore the sellers will come back to the fore around this resistance level.

I would have a potential stop at $5.23, which is the year-to-date high and a five-year high, with a limit at $5.04 which is the first support level.

TLS will break the $5.20 barrier soon enough; I just believe this announcement won’t be the reason for it to leg higher.

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