Two Telecom stocks to buy – Telstra & TPG

Telstra Corporation Ltd

TLS Details

·         First mover advantage: Telstra Corporation Ltd (ASX: TLS) stock recently reported that they are supporting the Australian Competition and Consumer Commission (ACCC) legal initiative against Vodafone regarding their decision on wholesale domestic mobile roaming. ACCC went against Vodafone decision of leveraging Telstra’s mobile infrastructure in regional and remote areas, where it has the least network coverage as compared to its peers. Moreover, recently ACCC decided to regulate high-speed internet services supplied by non-NBN fixed line networks. ACCC’s announced to set wholesale prices and other terms and conditions which would lead customers with several options to choose from. Telstra has a huge first mover advantage as the group invested more than $8 billion in the last six years for building Australia’s major and best mobile network with 15% of this investment directed to cover the last two per cent of Australia’s population. Telstra believes that ACCC decision would give all telecos to have the opportunity to invest in regional Australia and ensure more people can enjoy the benefits of future technology upgrades. Customers can enjoy the opportunities and benefits that 4G and in the future, 5G would offer to rural and regional Australia. Accordingly, Telstra is further investing $1 billion to strengthen their regional mobile coverage and expanding their 4G coverage to reach 99 per cent of the population. For the coming years, the group would see a further 1.4 million square kilometers of 4G coverage for regional and rural Australia. As a result, over 600 base stations would be upgraded from 3G to 4G, enabling the Australian population access to world-leading 4G networks. As per ACCC, Telstra’s fiber network prices would be $16.03 per port per month (Zone 1) for 2017 to 2018 and $21.10 per port per month (Zone 2) and $29.27 per Mbps per month for aggregation. An RSP would also need to be bought to Telstra’s wholesale line rental service, which is a further $20.69 per month. ACCC sees that the group’s fiber networks are subject to different pricing arrangements due to the cost of separating these networks from Telstra’s legacy network systems and the prospect that the fiber networks might be transferred to the NBN. The ACCC is unlikely to allow these arrangements to continue beyond the term of this pricing determination.
 
·        Stock performance: Recently Amazon is making efforts to target Australia’s major communication carriers, Telstra, Optus and Vodafone as they are launching a range of branded smartphones in the 4th Quarter 2017. TLS stock corrected over 17.9% in the last six months (as of July 17^th, 2017) placing them at reasonable levels, and having an outstanding dividend yield of 7.2%. We maintain a “Buy” recommendation on the stock at the current price of $4.22


TLS Daily chart; (Source: Thomson Reuters)

TPG Telecom

TPM Details·        

·      Investing heavily to withstand raising competition: TPG Telecom Ltd (ASX: TPM) bid for 2x10MHz of spectrum in the 700MHz band at the auction by the Australian Communications and Media Authority (ACMA). The spectrum license would start from 1 April next year and will expire on 31 December 2029. Accordingly, they are building a mobile network in Australia using current advanced technology for over $1.9 billion, which accounts over $600 million for network rollout capital expenditure over a three-year period to achieve 80% population coverage, and $1,260 million for the 700 MHz spectrum, which would be paid in 3 annual instalments. The group intends to deploy equipment at over 2,000 to 2,500 sites plus small cell sites across the country.Last year, the group even entered the Singapore where now in process of rolling out national mobile network. They expect to incur a capital expenditure of $142 to $182 million in FY17 at Singapore. 

700MHz band (703-803MHz) - nine national lots of 2x5MHz (Source: Company reports)

·       Stock performance: The group recently finished raising over $400.3 million via the entitlement offer. They also reiterated their FY17 guidance, which would not be impacted by the spectrum acquisition or the equity raising. TPM expects an underlying EBITDA of $820 million to $830 million for FY17. TPM stock has a 2.7% dividend yield and trading at a reasonable P/E. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $5.57


TPM Daily chart; (Source: Thomson Reuters)

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