How to play the Telcos from here (TLS, TPM, VOC)
The ASX200 struggled all day after a solid opening and finally closed marginally in the red after making fresh decade highs early in the morning. The banks gave back some of Wednesdays gains while the telco sector surged another +10.5% during the day to make it a stunning +39.4% advance over the last month – arguably the best illustration to remain open-minded provided by the market in 2018.
Interestingly following hard on the heels of yesterday morning’s report when we covered property, banks and retailers, Australia’s Building Approval data was announced for July in the morning and it came in at -5.2% month on month compared to the estimated -2%, as you know we believe things will get worse before they get better.
· We are neutral the ASX200 while the index holds above 6240 but we remain in “sell mode” albeit in a patient manner.
Overseas markets were overall negative with the US indices closing down -0.44% and Europe -0.7%, but the SPI futures are indicating the ASX200 will actually open mildly positive, a good result with BHP down -0.8% in the US.
Donald Trump is again banging hard on the “trade” drum threatening to pull out of the World Trade Organisation (WTO) and to slap another $200bn of tariffs on China next week – the extremely muted reaction by US stocks illustrates how optimistic things have become as markets “price in” the US President ultimately getting his way at every twist in the road. We question whether China will roll over like Mexico.
Today’s report will focus on the suddenly in vogue telco sector.
ASX200 Chart
A few subscribers have wondered why we didn’t “pull the trigger” on our buy emerging markets ETF (IEM) against short US indices ETF (BBUS) view especially as we are already long the BBUS I.e. short the S&P500.
The answer is we think following the sharp 6% rally by the IEM over the last 2 weeks a better entry point is likely to present itself.
· MM remains keen on the IEM with an ideal entry ~59.
iShares Emerging Markets (IEM) Index Chart
The Australian Telco Sector
The Australian telco sector has surged since David Teoh again showcased his talents by orchestrating the merger of Vodafone and TPG Telecom (TPM) to create a $15bn giant – Telstra’s current market cap is $38.4bn. The market has liked the synergy for TPM and especially the perceived end to a potential mobile phone pricing war which was likely if TPM went it alone i.e. good news for Telstra.
1 Telstra (TLS) $3.23
Yesterday TLS rallied another +3% to sit 24% above its June $2.60 low plus its paid an 11c fully franked dividend.
Following the strong run up in the share price TLS is trading on a Est. P/E of 15.4x for 2019 while yielding 6.81% fully franked.
We like the new direction for TLS under CEO Any Penn but while we felt the stock was extremely cheap under $2.70 its closer to fair value at today’s levels and we will potentially trim our large position, if the opportunity presents itself, closer to the $3.50 area.
There remains a lot of twists and turns ahead for this sector.
· MM is still positive TLS but we consider trimming our position ~$3.50.
Telstra (TLS) Chart
2 TPG Telecom (TPM) $9.31
TPM surged another +18.2% yesterday to see it up an impressive +60% over the last month!
TPM has sprung out of the unloved corner, probably assisted by a ~5% short position who are clearly hurting and probably in many cases covering at painful losses. Potentially optimism for TPM has now gone too far in the positive direction as Telstra and Optus remain solid adversaries.
We feel the value in the TPM-Vodafone merger has been more than built into the recent share price gains.
· MM is now neutral TPM
TPG Telecom (TPM) Chart
3 Vocus Group Ltd (VOC) $2.89
VOC actually fell 2c yesterday and clearly remains the ugly sister within the telco sector, especially over the last 2-weeks.
Over recent months we felt both VOC and TPM looked good value as a trade but VOC has now rallied from sub $2.50 to closer to $3 removing the attractive risk/reward.
VOC is now trading on an Est P/E for 2019 of 16.4x, not particularly cheap.
· MM is neutral VOC.
Vocus Group Ltd (VOC) Chart
Conclusion (s)
We feel the “easy money” from buying the depressed telco sector in mid-2018 is well and truly behind us with our view on the 3 stocks covered today below:
1. Telstra (TLS) – MM is are mildly positive from here but we need to see results from Andy Penn to expect strength above $3.50 and towards the next large psychological hurdle at $4.
2. TPG Telecom (TPM) – MM is now neutral after its impressive rally.
3. Vocus (VOC) – MM is neutral VOC.
Overseas Indices
Last nights relatively small decline by US indices can almost be taken positively considering the aggressive rhetoric from President Trump around trade.
· MM needs a weekly close below 2880 to generate warning signs technically.
US S&P500 Chart
European indices were weaker overnight, a weekly close below 7450 will look very poor for the UK FTSE.
UK FTSE Chart
Overnight Market Matters Wrap
· The US major indices broke its four day winning streak overnight on reports that President Trump supported additional tariffs on US$200bn of Chinese imports and also threatened to withdraw from the World Trade Organisation which he said “doesn’t shape up.”
· Base metals and iron ore prices slumped on the tariff reports leading to both BHP and Rio reversing their recent gains, slumping 2% and 1.5% respectively.
· The A$ also lost further ground, easing back 0.6%, hovering at recent lows of around US72.65c following yesterday’s slump in Aussie building approvals – is this the downturn in the property market?
· BHP is expected to underperform the broader market, after ending its US session down an equivalent of -0.81% to $33.51 from Australia’s previous close.
· The September SPI Futures is indicating the ASX 200 to open 9 points higher, doing its best to break its 10-year high!
Have a great day!
James & the Market Matters Team
Disclosure
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.
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