Telstra vs TPG share price outlook: What does 2021 hold?

'COVID has accelerated the consumer trend away from retail and call centres, and we expect that shift to continue' – TPG CEO.

A more competitive mobile market looms

In attempting to block the TPG-Vodafone merger, which was first announced in 2018, the ACCC was centrally concerned that with only three telecoms providers, not four, that Australian consumers would suffer.

Those arguments were knocked down in federal court earlier this year, and the merger went ahead without any further issues.

In a consumer-friendly move, the merged TPG-Vodafone entity, now formally known as TPG Telecom Ltd (ASX: TPG), in October announced the launch of its Felix telco brand – a low cost, environmentally-focused, and unlimited data mobile offering.

Felix will be a digital only, app-based service, has no lock-in contracts, will provider users with speeds of upto 5Mbps and operates over Vodafone’s 4G/3G network.

TPG’s Chief Executive, Iñaki Berroeta described Felix as ‘the way of the future’, noting that:

‘Seamless, sustainable and simple is what customers are telling us they want from their telco plan.’

'COVID has accelerated the consumer trend away from retail and call centres, and we expect that shift to continue.'

Not only that, but the standalone brand has an environmental spin, with the company committed to planting one tree per month for every month a user holds an active Felix subscription.

‘Environmental sustainability is important to us, and it’s important to our customers, shareholders and the community,’ Mr Berroeta.

Since that announcement, the TPG share price has risen close to 6%, opening Thursday’s session at $7.78 per share. The ASX 200 benchmark, by comparison, in that period has risen 7.2%.

Analyst thoughts on the telecom sector in 2021

Goldman Sachs, in surveying Australia's telecoms sector, recently reiterated their Neutral ratings on Amaysim and TPG Telecom while maintaining a bullish stance on Telstra, reiterating their Buy rating.

From a price perspective, Goldman expects the Telstra Corporation (ASX: TLS) share price to rise over the next 12-months, assigning the stock a price target of $3.75 per share. On the other hand, a price target of $7.30 per share on TPG, suggests some potential downside from current levels across 2021.

YTD, both telcos have seen their share prices decline around 13%.

Interestingly, although the launch of Felix may at first glance look like a significant opportunity for TPG, Goldman analysts believe that the addressable market may be lower than one may initially think due to restrictive bandwidth speeds, saying:

‘While Felix headline pricing looks attractive (i.e.A$35/m for unlimited data), we believe the 5Mbps cap significantly narrows the addressable market.’

For reference, mobile network speeds in Australia average 50Mbps, according to the investment bank.

With the entrance of Felix and other low-medium cost players in the mobile market, Goldman Analysts argued that this will allow ‘Optus/TPG to raise branded pricing in 2021, supported by ongoing improvements in 5G coverage and potentially the proposed AYS acquisition.’

‘Historically, positive mobile ARPU inflections have driven share price out-performance, hence we reiterate our Buy on Telstra ahead of its 2H21 positive mobile inflection.’

While positive trends in the mobile market are likely to help all telcos with mobile exposure, Goldman has retained a Neutral rating on TPG Telecom based on the notion that ‘strong’ market share gains have already been factored into the share price and the delay of the telco’s 5G roll-out.

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