I. Sector Landscape and Outlook

Australians are the early adaptors of technology. The nation topped 4^th place in the world for the highest average mobile broadband speed behind South Korea, Norway, and Canada in the GSM Association Mobile Connectivity Index. As mentioned in the ACMA Communications report 2018-19, the volume of data downloaded almost tripled over the fixed-line services and surged five-fold over the mobile networks in the four years period to 2018, driven by the growing adult population, higher penetration of smartphones, and increased adaption of smart technologies like Internet of Things (IoT), etc.

The Telecom and Communication sector earned its prevalence during the COVID-19. Broadband and online applications became essential to support remote working, education, entertainment, and social connection. Spending on communication services has been upward trending since the pandemic, it had shown an increase of 5.5% in September 2020 over last year. Increased usage of smart devices and technology in everyday life such as cashless payments on smartphones and watches, tracking public transport services in real-time, etc. The sector contribution to the overall Gross Value Added (GVA) stood at 2.40% in March 2020 quarter, surpassing the 3-year average of 2.35%.  

Figure 1. The Sector Contributed ~2.36% of GVA in September’20 Quarter:

Source: Data from The Australian Bureau of Statistics, Chart Created by Kalkine Group

Key Trends in the Telecom and Communication Sector:

Nearly about 99% of Australians accessed the internet in six months ending to June 2020. Australians spent more of their viewing time watching online or pay-per-view content than watching free-to-air television in real-time. During the pandemic, they were increasingly engaged in telehealth consultation, video conferencing, work or study from home activities.

Fixed-line phone usage continues to decline. Only 49% of Australian adults had a fixed-line phone at home in June 2019, down from 70% seen in four years ago. Many Australians aged 55 and above continue to use fixed-line phones as per the 2019 Communications Report by Australian Communications and Media Authority (ACMA).

Figure 2. Fixed-Line Phone Services Continue to decline:

Source: Data from The Australian Communications and Media Authority, Chart Created by Kalkine Group

A Mixed Trend for Fixed-Line in 2020:

In a separate report by The Australian Competition and Consumer Commission, fixed-line voice services remained steady in 2019-20 to reach 6.2 million subscriptions. In contrast, mobile phone services declined to ~28 million in 2019-20. Australians continue to favour mobile phone services over fixed-line services for voice calls. In relation with data download volumes, fixed-line gained the edge over mobile with 90% of the total volume of data downloaded in 2019-20.

Fixed-Line Ramp-up by NBN:

As mentioned by The Australian Bureau of Statistics, about 46% of the population worked from home in May 2020. Households relied on their home broadband supported by the wider availability of fixed-line connection by NBN Co Limited (NBN), a public-owned fixed-line internet provider. As people moved to their hometowns, Australia’s working from home in regional suburbs had doubled from March 2020 to August 2020. NBN extended the network reach to connect 11.73 million homes and businesses as of June 2020. The company experienced accelerated use with download demand increased by 12-15% and upload demand doubled at the start of the lockdown and remained consistently high throughout. NBN allotted up to 40% additional capacity at no extra costs to retail service providers.

The company plans to increase reach to 12.5 million by 2024-end through various investment programs. It had announced a planned investment of $3.5 billion for Fibre To-The-Node (FTTN), Hybrid Fibre-Coaxial (HFC), and Fibre-To-The-Curb (FTTC) residential network upgrades, $1.5 billion for various operational improvements, and $700 million for extending business fibre services.

Investment in Data Centres:

The remote working set-up enables businesses to move their data to the cloud. This saw significant investment opportunities in data centres. As mentioned by Infrastructure Australia, investments in hyperscale data centre are expected to increase at an annualized pace of 3.6% in the next five years to reach ~$4.60 billion by 2025 covering Australia and New Zealand market. Furthermore, cloud gaming services are expected to show strong offtake benefited from 5G technology. The Australian market for cloud gaming to increase from $3.6 billion in 2019 to $7.9 billion in 2021 as per the data by ACMA.

Figure 3. Cloud and Data Centre Investments to Accelerate:

Source: Data from Infrastructure Australia, Chart Created by Kalkine Group

The Internet of Things (IoT):

IoT enables the automation of a wide range of household applications and business processes such as autonomous vehicles, autonomous drones, etc. The implementation of 5G networks to accelerate the growth of IoT in Australia because these devices require greater speed of connectivity and higher data transfers. Telstra deployed Cat-M1 using 4G technology that supports devices with low complexity and suitable for use in utilities, healthcare, and supply chain. It also developed Narrow Band IoT for use in livestock and crop monitoring. ACMA projected 29 billion devices will be connected globally by 2022, of which ~60% are related to the IoT. In another estimate by The Bureau of Communications and Arts Research, the average Australian household will have at least 50 IoT devices by 2026.  

Cybersecurity:

Australia topped the cybersecurity and data governance ranking according to The Infrastructure Australia report. Spending on cybersecurity increased globally due to the surge in cyberattacks and increased use of IT applications and tools. Companies to continue to prioritize spending on new models of working such as VPNs, multi-factor authentication, end-point protection, among others. As mentioned in the Infrastructure Australia report, cybersecurity to see an uptick in spending by 8.1% on an annualized basis in the next four years to reach $6.4 billion by 2024-end. Sectors such as healthcare systems and services, banking and financial institutions, technology, media and telecommunications, and public and social sector to witness an increase in cybersecurity spending in the next twelve months. 

5G Rollout:

Telstra, Optus, and TPG Telecom have started rolling out fifth-generation (5G) mobile. ACMA estimated more than 400 sites across Australia had 5G-capable mobile base stations. The Australian government is opening-up more spectrum, with the next auction for 5G spectrum is scheduled for early 2021. Telstra to bring $500 million of capex planned for the second half of FY21. This will equate to 75% of the population gaining access to 5G coverage when they be available by June 2021. TPG to launch 5G fixed wireless products in the first half of 2021, aiming to cover 85% of Australia’s’ population in major cities by 2021-end. Optus announced it had enabled more than 900 sites for 5G rollout. It was the first to offer 5G home broadband services.

Index Performance:

The ASX 200 Communication Services Index generated returns of ~+14.81% in the last 2 years vis-à-vis ASX 200 Index returns of +12.75%. Increasing shift to high-speed internet connectivity, strong coverage in regional suburbs, widen the reach of social connectivity, and adaption to IoT resulting in gains in the index performance.

Figure 4: ASX 200 Communication Services Index outperformed ASX 200 Index by 2.06% over the last two years

Source: Refinitiv (Thomson Reuters) as on the close of 28 January 2021

Key Risks and Challenges:

During 2019-20 bushfire crisis impacted the mobile coverage and fixed-line services resulted in network outages and collisions in network infrastructure. The industry faced congestion during the initial COVID-19 period with a spike in data downloads and uploads. Similarly, as large working populations migrated to regional suburbs where usage in such areas was not set-up to manage business-grade usage causing congestion. This may require an increased infrastructure spend. Affordability is the key barrier for mass digital inclusion. About 20% of the 4 million primary and secondary students in Australia are from households with the lowest income bracket.  

Figure 5. Key Risks Affecting the Telcom and Communication Sector:

Sources: Chart Created by Kalkine Group

Outlook:

To increase mobile coverage and penetration, the government has implemented The Mobile Black Spot Program in 2014-15. It had recently completed the fifth round of funding for 182 new mobile base stations. This will aid the 5G technology adaption. More than 1,200 base stations were funded under the program and over 880 are already activated as of November 2020. Base stations under five rounds are scheduled to be operational by June 2022. So far, the program drew investment of ~$836 million from the government. The government is currently conducting 5A round for an investment of $34.5 million. The Australian government provided a budget of $30 million to support investment in 5G technologies and cybersecurity. The ACMA granted the license for 15 applicants in the 26GHZ and 28GHZ bands. This represents the first step in the series of 5G-ready applications in these mm Wave spectrum bands.

II. Investment theme and stocks under discussion (TLS, SGN, OML, SLC)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Enterprise Value/ Sales’ method.

1. ASX: TLS (Telstra Corporation Limited)

 (Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$37.34 Billion)

TLS provides domestic and international telecommunications services. The company offers telephone exchange lines to homes and businesses, supplying local, long distance and international telephone calls and mobile telecommunications services besides providing data, internet, and on-line services.

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 24.39% on 28 January 2021. We have applied a slight premium to the peer average EV/Sales (NTM Trading multiple) considering its progression in 5G rollout covering 53 cities, strong improvement in FY20 EBITDA margin, while also taking into account its historical discounted trading multiple versus peers. For the said purposes, we have taken peers such as 5G Networks Ltd. (ASX: 5GN), Spirit Technology Solutions Ltd. (ASX: ST1), Vocus Group Ltd. (ASX: VOC). The stock delivered annualized yield of 5.09%.

2. ASX: 5GN (5G Networks Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$159.30 Million)

5GN provides internet broadband and cloud infrastructure services to mid-market corporate industries in Australia. It offers internet access, cloud computing, virtual private network, video conferencing, among others. 

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 25.31% on 28 January 2021. We have applied a slight discount to the peer average EV/Sales (NTM Trading multiple) considering the low scalability compared to its peers, sequential losses although profitable at EBITDA level, risk associated with the elevated competition in the wired and fixed-line services. For the said purposes, we have taken peers such as Spirit Technology Solutions Ltd. (ASX: ST1), Uniti Group Ltd. (ASX: UWL), MNF Group Ltd. (ASX: MNF).

3. ASX: OML (oOh!media Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$935.02 Million)

OML operates as a media company providing advertising and marketing solutions, campaign production, campaign management, creative and digital solutions.

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 24.59% on 28 January 2021. We have applied a slight discount to the peer median EV/Sales (NTM Trading multiple) considering its losses in H1 FY20, cost cutting in ad spend by majority of companies due to the pandemic, while also taking into account its stretched valuations vis-à-vis peers. For the said purposes, we have taken peers such as News Corp. (ASX: NWS), HT&E Ltd. (ASX: HT1), Southern Cross Media Group Ltd. (ASX: SXL). The stock delivered annualized yield of 4.74%.

4. ASX: SLC (Superloop Limited)

(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$364.03 Million)

SLC is a telecommunications infrastructure provider. The company operates underground fibre-optic cable network. It conducts business throughout the Asia Pacific region.

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 10.38% on 28 January 2021. We have applied a slight discount to the peer median EV/Sales (NTM Trading multiple) considering its FY20 EBITDA margin below to the Industry Median and heightened competition in fixed-line wireless business resulting in higher customer churns. For the said purposes, we have taken peers such as Telstra Corporation Ltd. (ASX: TLS), Macquarie Telecom Group Ltd. (ASX: MAQ), Spirit Technology Solutions Ltd. (ASX: ST1).

Note: All the recommendations and the calculations are based on the closing price of 28 January 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

---

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.