Telstra – has it turned the corner?
What Mattered Today
A fairly lacklustre end to the week with the index limping into what’s going to be a cracking weekend for Sydney siders…Summer has finally arrived by the look of it.
Source: bom.gov.au
We had a range today of +/- 17 points, a high of 5447, a low of 5430 and a close of 5434, off -1pt or -0.03%. An extremely tight range while volume was low and the restaurants in the city were full – which is probably where most action was seen today.
ASX 200 Intra-Day Chart
ASX 200 daily chart
For the week we’ve seen the index fall by around 0.5% - which is the first drop in the last four. It seemed to be risk off with Materials down around 1%, Energy gave back some of its recent gains losing -1.50% and the financial space drifted nearly -1% lower. Still, there were some reasonable spots with the much maligned ‘telco sector’ seeing some love with Telstra (TLS) actually up on the week – finding some obvious support around the $5.00 mark. This of course comes on the back of a -6.3% drop the prior week for the sector so in context, only a slight recovery.
Telstra (TLS) Daily Chart
Telstra (TLS); At current prices TLS trades on a forecast yield of 6.1% plus franking (8.7% gross) based on 31cps forecasted dividend – which is likely to stay flat until at least FY19 on our numbers. The stock is not overly expensive trading on 14.2 times expected FY17 earnings, so about a 15% discount to the market. Surely with these metrics TLS should be a BUY here??
The risk as we’ve been highlighting in recent times stems from the artificially inflated earnings courtesy of the one-off NBN payments. Although the BIG one off payments seem impressive, it will come down to Telstra’s ability to reinvest those payments, given they lose $2bn-$3bn of re-occurring earnings over the next 3-3.5 years. That said, it seems this is now a very well known-known with the market having digested this over the last few months – hence the weakness in the stock. The reason we say this is that when the market is collectively positioned a certain way as it is with TLS (shown by analysts’ views below) it sets the scene for strong counter trend moves. At some point, TLS will rally hard and we’ll be looking to get set for this when it happens.
Source; Bloomberg
We’ve been negative TLS for some time and have written about a $4.70 downside target – which seems plausible from here. We’ve obviously seen a big leg down from $5.85 to $4.95, a small bounce to $5.20 and a probable failure at that level. It actually looks similar to Sydney Airports (SYD) and Transurban (TCL) we’ve written of in recent notes and we think these have further to fall – however, we should now be looking for some type of panic low, where the market gets too bearish these stocks. We’re not there yet but worth starting to think about.
In terms of TLS relative to the market, the underperformance is fairly stark… They’ll be an opportunity here at some point.
Telstra (TLS) v the ASX 200 over the past year
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FUTURES mixed….
Have a great Weekend
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