Better year forecast for telcos with major network operators increasing mobile phone charges

Australia’s major phone network operators Telstra and Vodafone are expected to fare better on the ASX in 2024 with mobile price increases to underpin their resurgence.

After underperforming in 2023 the Australian telco sector is expected to have a better time in the year ahead with mobile phone charge increases to be a key part of a share price resurgence.

A UBS analyst note forecast Telstra to be a star performer with a price target of $4.50, while TPG Telecom (Vodafone) was rated as neutral with a target price between $5.14 and $5.45.

The analysts said mobile pricing, more efficient deployment of capital and cost outs were set to remain the key levers for industry return on invested capital (ROIC) recovery in 2024.

“With Australian 10-year bond yields moving from 5 per cent to 4.1 per cent, we see a more positive environment for a general rerating,” they said.

“We see the key mobile network operators (MNOs) likely to be able to continue to execute on price increases, despite rising of cost-of-living pressures and continued macro uncertainty.

“We see Telstra continuing to lead the market with CPI-linked price increases across postpaid, as well as steadily repricing prepaid and wholesale contracts.

“Our UBS Evidence Lab Survey from July last year showed consumers were willing to pay more for services at Telstra and TPG, due to improving customer perceptions on network reliability.”

UBS said Telstra was expected to complete the first stage of its intercity fibre build in 2026 which was likely to drive growth, while Starlink’s launch of six satellites for direct-to-mobile services would improve operations.

UBS is forecasting Telstra to be a star performer. Picture: NCA NewsWire / Luis Enrique Ascui

However, cost inflation remains a key risk for the sector, despite broader inflationary pressures likely to ease in 2024.

The analysts said they were also watching risks from mobile virtual network operators (MNVOs) – or wireless communications providers that don’t own the wireless network – as household budgets remain constrained.

“We remain watchful of potential share loss risk to MNVOs, particularly as the macro environment continues to remain uncertain and cost-of-living pressures continue to impact consumer household budgets,” they said. “Mobile pricing is likely to remain a key lever for the Australian telcos in 2024, as the industry looks to improve profitability and ROICs. “

UBS said Telstra’s initial target of $500m fixed cost reduction between 2023 and 2025 had been restated to achieving a “large majority” of this target, with energy costs flagged to sit $100m higher against initial expectations in the 2022 financial year.

“TPG also communicated cost reduction initiatives under their Customer Experience Simplification program, which we remain watchful of the labour cost and energy price inflations into 2024.”

Telstra shares closed up 2.2 per cent on Monday at $4, while TPG rose 0.4 per cent to $5.14.