Telstra & TPG share prices: the 2020 telecommunications outlook

We examine Macquarie Wealth Management’s outlook for some of Australia’s key telecommunications stocks.

As a decision over the TPG-Vodafone merger court case looms, the ‘competitive dynamic’ of Australia’s mobile market is likely to come more deeply into focus in the months ahead.

Indeed, looking at a breakdown of Telstra’s financials, mobile continues to be a significant driver of profitability for the blue-chip telco, now accounting for 48% of the company’s earnings (EBITDA).

Concentration of earnings aside, Macquarie continues to highly rate the telco. The investment bank currently has an outperform rating on Telstra (ASX: TLS) and a 12-month share price target of $4.00.

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Looking at the specifics here, Macquarie notes that ‘corporate revenue declines may accelerate due to increased competition’, and that fixed-line, once a staple of the company’s line-up, is likely to decline as NBN migration intensifies across the board.

Cash flow is also expected to stay weak for some time, though the investment bank anticipates improvements in FY21.

Although these are distinct negatives, the situation is an improving one. Macquarie posits that mobile trends have been gradually getting better since August 2019, with it being pointed out that ‘we do see scope that Telstra is gravitating toward the upper end of its FY20 guidance.’

'The corresponding improvement in ARPU, revenue and EBITDA trajectory during CY2020 should be a positive thematic for Telstra over the next 12 months.'

Surveying the broader telecommunications sector, we see that Macquarie is also bullish on the likes of Amaysim (ASX: AYS). The investment bank currently has an outperform rating on AYS, and a share price target of 62 cents.

The Amaysium share price currently trades for 34 cents.

Macquarie has a less favourable outlook on Vocus (ASX: VOC) – a Sydney-based telco – hitting the stock with a neutral rating and a $3.20 price target.

TPG vs Telstra share price: revisited

Though Macquarie is restricted from covering TPG – the investment bank has nonetheless noted that the upcoming federal court decision regarding the TPG-Vodafone merger is likely to be of strong interest for investors, given the significance mobile now plays in the sector.

Looking at a worst/ best case scenario off the back of this looming decision, and drawing on research from Morgan Stanley, we previously wrote; that should the TPG-Vodafone merger be rejected:

‘Telstra would be able to strengthen its dominance in Australia’s mobile market; of which the blue-chip telco already has a strong position in.’

By contrast, if the TPG-Vodafone merger was allowed to go ahead:

‘Not only would this potentially curtail Telstra’s mobile subscription growth – but by creating a strong third player in Australia’s telecommunications market – TPG-Vodafone would have the potential to effectively grow its mobile market share.’

This would rank as a key positive for TPG, Morgan Stanley noted some months ago.

Justice John Middleton is expected to hand down his decision on the case in February.

Watch this space.

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