The Telstra Corporation Ltd (ASX: TLS) share price could be set to make a big move in two weeks, according to a leading broker.
The problem is that it could be either up or down – and no one knows because it hinges on the outcome of the Federal Court's ruling on the merger between TPG Telecom Ltd (ASX: TPM) and Vodafone Hutchinson Australia (VHA) that is due on October 1.
Of course, the TPG share price is also likely to make a big move on that day and it's likely to be in the opposite direction to the Telstra share price, which is up around 11% over the past year and is slightly ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, while TPG has slumped around 21%.
Brace for an up to 10% share price move
Morgan Stanley has worked out four possible outcomes for the Telstra share price and three of these are positive for our largest telco!
What's more, the broker estimated that Telstra's shares could move between 5% and 10% higher if the Federal Court upholds the Australian Competition and Consumer Commission (ACCC) ruling to block the tie-up between TPG and VHA.
On the other hand, the stock could also crash by a similar magnitude if the Federal Court overturns the ACCC's decision.
"In our view, a merger creates a stronger third mobile player, which should eventually lead to an increase in competition," said Morgan Stanley.
"This could constrain TLS's mobile subs growth, threaten increases in ARPU [average revenue per user] and add further pressure to margins i.e. downside risk to TLS EPS/DPS [earnings per share/dividend per share."
How an appeal could impact Telstra
The third and fourth scenarios calls for the Federal Court decision to be appealed to the High Court by the losing party.
Under either of these outcomes, the Telstra share price could run higher.
"In essence, the longer this court action lasts, with more appeals, the better we view it for TLS's near-term EPS/DPS and the clearer leadership it can build in 5G," added the broker.
Interestingly, the scenario that will lead to the biggest valuation uplift is if the merger is rejected by the Federal Court and is appealed. Morgan Stanley thinks Telstra is worth $4.01 a share under that outcome.
On the other hand, if the court takes the ACCC's side and the decision is not appealed (not likely given what's at stake), the Telstra's share price would be worth $3.83 a share.
Until the court's decision is known, Morgan Stanley has an "underweight" recommendation on Telstra with a price target of $3.20 a share.
