Mr. Hannan said he “expects Telstra trends to improve” in the second half of the fiscal year as prices increase, as TPG also increased prices and subscriber dynamics improved quarter-over-quarter.
His “buy” rating and price target of $4.60 are representative of the broader analyst consensus surrounding Telstra. Of the 16 analysts covering the company, 13 have a “buy” or equivalent rating on the stock, Bloomberg says.
Macquarie analysts — which rate Telstra a buy but a neutral rating for TPG — believe subscriber growth will remain subdued for some time due to pressure on the cost of living.
They predicted that many consumers would switch to cheaper prepaid cellular plans or switch to low-cost mobile virtual network operators (MVNOs) that resell connections to cellular networks with lower overheads.
Users are looking for cheaper plans
However, Telstra and TPG will be able to offset some movement to virtual cellular network operators considering they have their own budget brands, Belong and Felix. TPG, for example, said it added 104,000 prepaid subscribers to its MVNO brands in 2022, while its main brand Vodafone added 92,000 prepaid subscribers.
Macquarie said the prospects for continued revenue growth per user in mobile phones are positive “given unified messaging between the three networks for further price increases.”
However, they are more skeptical about price increases after this year.
“We estimate Telstra has only a 50% chance of inflation-driven price increases in FY24+, so a firm commitment from the group would be positive for our earnings guidance,” Macquarie said.
Based on the experience of US airlines, Macquarie believed user churn in the postpaid market would slow due to the price increases, but noted that the move to prepaid plans was unique to Australia.
Morningstar analyst Brian Han said TPG’s market share of wireless revenue declined in 2022. He figured the price hikes and market rationality would fix that.
“TPG Telecom’s realized postpaid price [is] still 15 percent below Telstra and 20 percent below on a “sticker price” postpaid pricing plan, said Mr. Han.
“Importantly, TPG Telecom’s plans to ‘refresh’ its postpaid pricing could be the catalyst that both Telstra and Optus have been waiting for to ensure the industry earns a decent return on the money needed to launch 5G preserves capital expended and eradicates the ‘subscriber hunt’ all-cost mentality that has clouded returns for everyone since 2017,” he added.
While he said investors may be concerned about consumer pricing hikes “conditioned on bargain deals from Vodafone,” Morningstar’s estimates that TPG will increase EBITDA by $40 million in calendar year 2022 already consider “sufficient churn.” .
Mr. Han said TPG’s underlying EBITDA of $1.8 billion is in line with his estimates and supports his projections that it will reach $1.9 billion in 2023.
“The excellent earnings growth in the second half confirms our earnings forecasts, which are driven by the key levers we anticipated (recovery from COVID-19, transformational advantages after the TPG-Vodafone merger, a more rational 5G-driven competitive market),” he said .
Mr. Han rates TPG as “buy” with a target price of $7.40.
