The Telstra Corporation Ltd (ASX: TLS) share price is on the backfoot today even as the market is anticipating an interest rate cut this afternoon.
Lower rates tend to be a boon for defensive income stocks but the Telstra share price couldn't shake the gloom after copping a downgrade by UBS.
The stock dipped 0.1% to $3.82 during morning trade even as the APA Group (ASX: APA) share price, the Spark Infrastructure Group (ASX: SKI) share price and AGL Energy Limited (ASX: AGL) outperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index at the time of writing.
Why Telstra is looking fully valued
UBS thinks investors should temper their enthusiasm for Telstra following its 46% rally over the past 12 months as it cut its recommendation on the stock to "neutral" from "buy" even as it lifted its price target on the stock to $4 from $3.60 per share.
It isn't only yield that's drawing investors to the stock. The market is also excited about the prospect of a turnaround in its mobile business, although this upside may have been more than priced into the stock.
"As a reminder, TLS postpaid ARPUs [average revenue per user] declined -2.4% yoy in 1HFY19 (-4% ex accounting reversals)," said UBS.
"We see declines accelerating to -6-7% yoy in both 2HFY19 and 1HFY20, reflecting damage done from industry pricing in previous periods, and TLS's continued loss of its c$500m excess data revenue pool."
Is there longer-term value in the Telstra share price?
The latest mobile pricing plans from Telstra puts the sweet spot at $60 per month, which is ahead of the average ARPU in 2HFY19 of around $53 per month. That means APRU might start to grow again although investors will probably have to wait until FY21 for that (assuming its competitors don't trigger another price war).
Telstra could also represent value over the longer term from the rollout of 5G and the potential write-down of the NBN.
I think investors have priced in some of the upside from these developments despite the uncertainty of these events.
The next-gen high speed mobile data technology is grabbing headlines but I don't think it will be a material earnings driver for some years given the technical limitations of 5G (not to mention cost).
I'll cover the issues in more detail in another article but I believe 5G won't give the same strategic advantage to Telstra compared to 4G, which allowed the telco to beat competitors with superior coverage.
The other possible tailwind from the write-down of the value of the NBN is also hard to predict, in my view. I rated the probability of this happening quite highly before the federal election when polls suggested a Labor victory.
But that didn't happen and I believe the Coalition has less motivation to cut the carrying value of the national broadband network, which was built under the watch of the LNP. Doing a write-down will give Labor an avenue to renew their attack on the government and the controversial project.
