Analysts back in the race with their Telstra buy ratings

Analysts are starting to upgrade Telstra after a strong performance on the market as the telco announced price hikes.

It was nice to see Macquarie admit it was wrong to downgrade Telstra after it decided to remove the CPI-linked annual price review from its mobile phone plans.

But, the whole market has been wrong about Telstra for the past few weeks.

Macquarie upgraded Telstra to Outperform on Wednesday as the telco roared back to life after announcing mobile phone plan price hikes which were, on average, well above CPI.

“We misinterpreted the step-away of inflation-linked pricing as an industry negative,” said Macquarie analyst Darren Leung, while also boosting his price target from $3.70 to $4.40 per share.

Far from signalling a price war on mobile phone plans, as the share market feared in recent weeks, it looks like Telstra’s decision in May actually just gives it more flexibility on pricing.

As this week’s announcement shows, this flexibility can work in both directions.

Investors who sold out in recent weeks must be kicking themselves.

After diving to a near three-year low of $3.39 after its May 21st announcement, Telstra had bounced to $3.72 before this week’s announcement. It looked like the weaker buyers had capitulated.

By Wednesday, Telstra hit a three-month high of $3.83, jumping almost 5 per cent in two days.

What had looked like one of this year’s worst consensus Buy ratings on a major ASX-listed company now looks much less so. Telstra now trades about 9 per cent below Bloomberg’s consensus 12-month price target of $4.20 after trading as much as 18 per cent below targets in January and May.

Of course the consensus on Telstra has been nowhere near as “wrong” as it has been on CBA.

The consensus there is a Sell, yet CBA’s share price trades about 37 per cent above the average price target of $93.72. It has soared as much as 15 per cent this year to a record high of $128.97.

But, the whole market or investors got it wrong to a fair extent when they sold Telstra shares down from $3.67 to a three-year low of $3.39 in May after it cut the CPI-linked annual price review.

It will be interesting to see what happens after Telstra punched above its 200-day moving average at $3.79 on Wednesday. Perhaps it will be trading around the consensus price target in 12 months.

The consensus price target now seems more likely to shift up from the current $4.20.

While seeing risks from Telstra’s upcoming enterprising bargaining agreement and its network application and services outlook in its FY24 results, Macquarie’s Mr Leung now expects Telstra to announce a dividend increase to 9.5 cents per share for the first half of financial 2025.

He sees the dividend rising to 19 cents for the full year, putting Telstra on dividend yield of 5 per cent, or about 6.5 per cent for domestic shareholders after franking credits.

“One of our prior concerns was the dividend growth outlook,” Mr Leung said. “With the better-than-expected mobile pricing outcome, we think the dividend outlook has improved. The higher top-line growth also results in higher tax paid so should alleviate the franking credit balance issue.”

Telstra’s price increase by Telstra across its three major retail brands — Telstra, Belong and JB Hi-Fi — shows the group is “happy to remain a price leader and extend its lead against its peers”.

“The recent move by Optus is also helpful from an industry standpoint.”

Macquarie’s Leung now sees “at least one more price increase” by Telstra through financial 2026.

Interesting too was the jump in JB Hi-Fi shares on heavy volume on Wednesday.

Perhaps as a Telstra reseller the mobile plan price increase will help its margins.

Or there’s been an indication of increased sales stemming from tax cuts and subsidies.

Back on Telstra, Goldman Sachs analyst Kane Hannan reiterated his Buy rating after lifting his earnings and dividend forecasts after its mobile plan price hikes.

He said Telstra’s price increases, together with the recent increases by Optus, show the market remains “rational”.

While noting the “uncertainty” caused by Telstra’s update in May, Telstra’s mobiles earnings growth “remains strong”, driven by subscribers and average revenue per user, Mr Hannan said.

He also sees “flexibility benefits” of a non-CPI linked pricing mechanism.

As evidenced by Telstra’s pricing announcements on Wednesday, it gives potential for greater-than-CPI price rises on core plans while allowing for no price hike on the more price sensitive Starter plans, mitigating any concerns around price gouging.

Hannan says Telstra is now likely to upgrade its financial 2025 profit guidance range to $8.5-$8.7bn from $8.4-8.7bn when it reports in August — in line with its typical $200m range.

Moreover, it now has “much greater certainty around its mobile pricing outlook”.

Goldman’s Hannan sees the postpaid plan hikes driving a blended $2.50 ARPU increase for Telstra, which after adjusting for GST, consumer mix and the start date later this year should contribute $1.14 of ARPU growth.

Combined with the significant JB Hi-Fi and smaller Belong mobile plan changes — JB Hi-Fi plan changes take significant time to wash through the base — he now expects $1.20 ARPU growth versus $0.80 previously, and marginally stronger mobile ARPU trends into financial 2026.

“Ultimately industry returns need to improve for all network operators as this will incentivise increased investment by incumbents which ultimately benefits the customer experience,” said Milford investment analyst, Roland Houghton.

“As the industry leader, Telstra raising prices is a step in the right direction.”

“Mobile plans are very cheap in Australia relative to most developed countries and postpaid prices have only just gotten back to 2018 levels which is extraordinary if you consider the inflation we’ve experienced over the past few years.”