In my view, the ASX telco space is a compelling place to find opportunities. The world is becoming increasingly digital, so both Tuas Ltd (ASX: TUA) and Telstra Group Ltd (ASX: TLS) shares may be exciting options.
Tuas and Telstra are quite different businesses, even though they both operate in the same sector.
To be truthful, I own Tuas shares in my own portfolio. However, I'm going to be as impartial as I can when writing about these two ASX telco shares.
Both companies operate in an appealing sector. A mobile connection seems almost essential for most households and businesses these days, so I would say both businesses have fairly defensive earnings.
How can you choose between them, though? Here are my thoughts on the matter.
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Telstra shares
Telstra is the leading telco in Australia, with the most customers, the leading spectrum, and the largest mobile network. It's a huge business with strong economics for its mobile business.
The company has reached such a large scale that it's challenging to deliver outsized revenue growth, but its size also benefits it in terms of profit generation. In the FY24 result, total underlying income rose 1%, underlying operating profit (EBITDA) went up 3.7% to $8.2 billion, and underlying net profit for shareholders climbed 5.8% to $2.1 billion.
The crown jewel is the mobile division, which saw revenue rise 5% to $10.7 billion and EBITDA grow 9% to $5 billion. With Telstra, the strength of its mobile network means it's able to attract a large number of new customers each year and apply price increases. Telstra's mobile handheld users rose 4.1% (562,000 users) in FY24, with a 2.7% underlying increase over the average revenue per user.
I think Telstra's mobile earnings growth can continue, thanks to new users, price rises, operating leverage, and new uses for its mobile network. I'm excited by Telstra's 5G network's potential to compete with the NBN for home broadband connections.
One of the best reasons to like Telstra shares is the dividend. Its annual payment from FY24 translates into a grossed-up dividend yield of 6.4%, including franking credits.
Tuas shares
Tuas is a much smaller ASX telco share. It's based in Singapore and has quickly grown to have 1.1 million mobile subscribers, partly thanks to David Teoh's leadership. I'm excited by this business' growth potential.
The business is rapidly becoming a force in the Singapore market, though it's still one of the minor players. At the recent annual general meeting (AGM), the company revealed its active mobile services had grown by 26.6% year over year to 1.1 million.
This level of growth is helping the company's revenue soar. In the FY24 result, the company reported 36% revenue growth and a 60% rise in operating profit (EBITDA) thanks to an increase in the EBITDA margin from 36% to 42%.
I believe Tuas can continue growing its number of mobile users in Singapore and also become a notable player in the broadband market, where it recently reached more than 10,000 active subscribers.
Most excitingly, the company could expand into other countries, such as Indonesia and/or Malaysia, to significantly expand its addressable market and growth runway.
My verdict
I don't think any one of these ASX telco share options is right for every single investor.
Telstra pays a compelling dividend, whereas Tuas could be years away from paying a dividend and even longer from offering a decent dividend yield. For people wanting passive income, Telstra shares seem like the better choice, especially since its earnings are growing. Some investors may also like the fact that it's a large blue chip, potentially offering more stability.
For investors looking for capital growth and the strongest total returns (capital growth and dividends), I think Tuas shares could be the better choice for the long term because the company is at a much earlier stage of growth. If it executes well on its growth strategy, Tuas has the potential to become a sizeable telco in Southeast Asia, in my view.
