Telstra and friends facing 3 positive catalysts this June

The worse may be over for the Telstra Corporation Ltd (ASX: TLS) share price as Morgans is calling a bottom for the telco sector after a bruising four years.

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The worse may be over for the Telstra Corporation Ltd (ASX: TLS) share price as Morgans is calling a bottom for the telco sector after a bruising four years.

The TLS share price, along with the TPG Telecom Ltd (ASX: TPM) share price and Vocus Group Ltd (ASX: VOC) share price, have started to bounce recently although experts are divided on whether this is time to be taking profit given the tough outlook for the sector.

But Morgans points to three upcoming catalysts in June that could provide a second wind for the telco sector, even as the NBN and mobile price competition continue to cast a long shadow over these stocks.

What was eating the sector

The NBN is a key reason why Telstra and its peers have underperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as the price set by the national broadband operator is too high for telcos to make a decent profit.

TPG's plan to roll-out a fourth mobile network was also a key contributor to the gloom as experts warned of an impending price war as the new entrant had to fight for market share.

But these headwinds are not as strong as what they used to be.

3 positive catalysts

In fact, Morgans thinks the sector has passed the "peak pain point" when it comes to the NBN with consumer prices going up for the first time ever!

"[Seventy percent] of households are forecast to have transitioned to the NBN by June 2019, rising to 75% by December. This means we are through the bulk of the forced churn event," said Morgans.

"Perversely TLS still holds >50% market share in the NBN and after years of price-based competition things are looking up. During February most Telco CEOs noted the NBN is unsustainable and since then we have actually seen household price rises to help offset higher input costs under the NBN.

"This is, in our view, the first sign that things will improve from here."

Let's also not forget that the federal government (whoever that might be come next month) is likely to cut the book value of the NBN, which is likely to see wholesale prices charged to the telcos drop further.

Interestingly, I think a Labor government might have more incentive to cut the carrying value of the NBN given that it can blame former Prime Minister Malcomb Turnbull for the write-down.

The second catalyst is the launch of the next-generation mobile data technology called 5G. Morgans thinks the introduction of 5G will shift consumers' focus to quality over price – and that's one battle Telstra is more apt at winning.

The last positive trigger could come from the Australian Competition and Consumer Commission (ACCC) as the competition watchdog is suppose to release its decision on the merger between TPG and Vodafone.

If the ACCC gives its blessing to the marriage, the sector is likely to jump higher.

But it's Telstra that is best placed to benefit from these three catalysts, in Morgans' opinion. The stock is the broker's star pick for the sector.

Motley Fool contributor Brendon Lau owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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