TPG lays siege to Telstra shares

Telstra’s shares are likely to face further hits with the entry of TPG Telecom as a mobile operator.

Telstra’s shares are likely to face further hits with the entry of TPG Telecom as a mobile operator, further muddying the incumbent telco’s earnings outlook, analysts have warned.

“We believe the share price will fall in absolute terms over the next 60 days,” Morgan Stanley analyst Andrew McLeod said.

Currently almost 50 per cent of the revenue stemming from the mobile market flows into Telstra’s coffers. The mobile business accounts for almost 35 per cent of the telco’s earnings and much of this is underpinned by the strength and reach of its network, which allows Telstra to extract a higher premium from its customers.

TPG’s $2 billion plan to create Australia’s fourth mobile network now poses a significant risk to the status quo. “As a result of this development we see a wider risk profile surrounding Telstra’s future earnings and valuation as a result of likely increased mobiles competition,” Mr McLeod said.

Morgan Stanley, which is underweight on Telstra, has set a price target of $4.50.

Meanwhile, Citigroup reckons a four-way mobile race in Australia will make it tougher for Telstra to fill its NBN earnings gap. “Mobile was supposed to be the key driver of earnings growth, and Telstra’s main revenue growth opportunity in its plans to offset the $2bn-$3bn (earnings) gap caused by the transition to NBN,” Citi said.

Telstra shares, which tumbled 7.5 per cent on Wednesday, fell another 1.4 per cent on Thursday to $4.16.