All about the Telco’s today…
More resilience shown by the market in general today as it continues to brush off reasons to drop and grinds onwards and upwards. April the most seasonally strong period for stocks and thus far it’s playing to script, up +1.18% in the first 12 days, keeping pace with its average gain of +2.79% . Statistically, we should see 6000 by month end!
The market chopped around par for most of the session in a range of +/- 31points, a high of 5944, a low of 5913 and a close of 5934, up +4pts or +0.08%. Telstra (TLS) the standout from an index perspective detracting 13 index points from the market after dropping more than 7%. More on that below
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
A very poor day for the Telco sector with Telstra (TLS) down -7.46% to close at $4.22, its lowest level since 2012, Vocus (VOC) continued its poor form falling by another -5.6% to close at $3.37 (ouch!) while TPG Telecom (TPM) was in a trading halt after the announcement this morning which proved the catalyst for all this carnage. Telstra did a massive 209m shares today which is the biggest volume day I can see.
Telstra (TLS) Daily Chart
Firstly on TPG; They announced they’ve successfully bought Spectrum for around $1.3bn and plan to build their own mobile network over the next three years, spending around $600m. They’ll fund it via a combination of operating cash flows, debt and an $400m equity raise which was launched today. This was the issue we were concerned about in terms of our TPG holding recently, and it’s the reason we liquidated that positon around $6.60.
The equity raise is via a non-renounceable entitlement offer, on a 1 for 11.13 basis, so existing holders will get the opportunity to BUY 1 share for every 11.13 they already own at $5.25, however it’s non-renounceable which means if if you don’t take it up, then you get nothing for it. The stock will drop when it comes back online on or before Tuesday 18th April – probably below $6.00 in our view. They paid a BIG price for the spectrum given the reserve was set at $860m and they’re now the 4th mobile network in Oz.
TPG Telecom (TPM) – in a trading halt until the 18th April – will get hit when it comes back online
Clearly this changes the market structure and competitive dynamics of the industry, with TPG to come in as an aggressive price discounter. This is obviously not positive for TLS, Optus or Vodafone – hence the big decline in TLS shares today. ARPU is what the industry talks about, which is Average Revenue Per User. Currently, TLS ARPU on post paid product is $59, assuming a 10% reduction to that given competitive pressures, and we’re only speculating here, that equates to ~7.5% hit to TLS earnings. That said, this is in three years’ time and what has occurred today is not new news.
Speculation on TPG’s likely bid into this auction has been rife and shouldn’t come as a surprise. TLS has been sold down from $5.30 in January to $4.56 yesterday – a drop of -14% pre-empting this issue. The decline of another 7% today takes the total drop to ~21%. This could well be a case of sell the rumour, buy the fact!!
We stepped up and bought Telstra today, allocating 5% of the MM portfolio to the stock. At current pricing and assuming 31cps dividend, that’s 7.3% plus franking or 10.49% gross, which is compelling + they have a war chest to diversify their future earnings away from the competitive local telco space. We do acknowledge there is a high degree of uncertainty in the telco space at the moment, and if we continue to see TLS slide away, we will cut our losses and move on, however risk / reward at current levels stakes up.
In terms of Vocus, we sold this early in the week and the stock has continued to slide. It looks ugly and price action is suggesting all is not good with that business. We sold on concerns around earnings and continue to think a downgrade could be looming.
Vocus Communications (VOC) Daily Chart
We discussed these and some other trends on our weekly video update today…click to view
Have a great night,
The Market Matters Team
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