Citi cuts Telstra earnings forecast

Citi has flagged pressure on Telstra’s mobile market hold, as it lowered its earnings forecast for the telco.

Citi expects Telstra to report an 8 per cent rise in interim earnings per share. Picture: Carla Gottgens/Bloomberg via Getty Images.

Telstra’s strong hold on the mobile market will be under scrutiny and pressure this year, with the possibility of a new competing network and regulatory intervention, according to analysts at investment bank Citi.

Citi — which has cut its earnings forecasts ahead of Telstra’s interim results on February 16 — says a government-run spectrum auction in April, from which Telstra is excluded, could enable the entry of a fourth mobile network and further tighten competition.

A new mobile player is more likely if the nation’s competition regulator decides to regulate the domestic mobile roaming service, according to a report from Citi analysts David Kaynes and Manisha Sandilaya, although they caution the odds are against both outcomes.

Optus and Vodafone Hutchison are expected to snap up the available 700 MHz spectrum even though TPG Telecom has flagged its intention to participate in the auction, Mr Kaynes and Ms Sandilaya said.

If TPG was successful, Citi expects the telco, which is run by founder David Teoh, to start building Australia’s fourth mobile network.

The Australian Competition and Consumer Commission is currently considering regulating mobile roaming charges.

Telstra would face greater competition in regional areas where it is the main phone service provider if the ACCC set prices for access to mobile networks outside major centres.

With the pace of the NBN rollout expected to accelerate this year, Citi expects more intense competition in fixed-line broadband over the next two years. Citi has cut its earnings per share forecasts by 1-2 per cent ahead of Telstra’s first-half results, citing expected revenue falls in all three of the its largest product lines: mobile, fixed products and data and IP.

However, Telstra is expected to book a 76 per cent increase in one-off payments from the company rolling out the national broadband network. Citi expects Telstra to report a 2 per cent rise in total income to $14.1 billion for the six months to December 31, and a 3.5 per cent jump in earnings to $5.4bn.

That compares with Telstra’s 2017 guidance of mid-to-high single digit income growth and low-to-mid single digit earnings growth.

Citi expects Telstra to report an 8 per cent rise in interim earnings per share to 17.4 cents a share, and a flat fully franked dividend of 15.5 cents. Citi has had a sell rating on Telstra since September, with a target price of $4.50, well below its average of $5.10 over the past month.

AAP