Don't expect the debate on whether Telstra Corporation Ltd (ASX: TLS) is an attractive high-yielder or a dividend trap to be settled anytime soon, although Morgan Stanley thinks it may have found the answer.
Telstra's share price has fallen nearly 17% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 4%. The upside from Telstra's dismal performance is that its yield is sitting at over 10% if franking is included.
It's not only Telstra that is causing shareholders grief. Other telcos have also been in the dog house with TPG Telecom Ltd (ASX: TPM), Vocus Group Ltd (ASX: VOC) and Amaysim Australia Ltd (ASX: AYS) nursing big losses as well.
Coming back to Telstra, Morgan Stanley thinks our largest telco is likely to follow in the footsteps of French mobile operator Orange France in wondering the mobile wilderness for several years.
Mobile is Telstra's biggest earner and arguably its most important business. The impending entry of TPG Telecom as the fourth mobile player in the Australian market shares a lot of similarities with what happened in France when Iliad SA became that county's fourth player.
Morgan Stanley noted that incumbent Orange France has only just posted its first positive quarter for mobile revenue in the three months to end December 2017 after six-and-a-half years!
"Why? Mobile disruption, after rival Iliad launched an altogether new, fourth French mobile network in 1Q 2012 and by end-2017 had accumulated a 17% market share (14m subs). Only now, some 6.5 years later, has Orange returned to positive mobile growth," said the broker.
"For perspective, pre-Iliad in 2011, Orange's mobile EBITDA was €3.7bn (margin 36%) … by 2017, it was €2.3bn (margin 33%). That's a meaningful €1.4bn in lost EBITDA, a 37% fall."
Telstra is facing a similar fate in Morgan Stanley's opinion and competitive pressure is already ramping up even before TPG's mobile services launch with Telstra facing increasing competition across 75% of its revenue base.
For these reasons, Morgan Stanley has cut its price target on the stock to $3.00 from $3.40 a share and reiterated its "underperform" recommendation on Telstra.
Further, I think Telstra won't find much relief even if NBN Co. were to cut the value of its national broadband network as some analysts have speculated. The write-down in value of the NBN will lead to better pricing for Telstra and other NBN resellers but it won't be enough.
Telstra bulls are also pinning their hopes on the arrival of the next generation mobile data network 5G, which they believe will help Telstra regain its dominance as happened when 3G was launched.
I doubt this as fast mobile data has become commoditised. You can expect TPG and the other mobile rivals to respond with their own offering.
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