I remain a structural bull on mobile data growth driven by “internet 2.0” meeting next generation smartphones and 4G mobile networks.
Mobile data addiction (MDA), which I can admit I definitely suffer from, remains the key driver of my still bullish Telstra (TLS) recommendation.
But judging by the smartphone penetration rates in Australia, I am not alone with my MDA.
In Australia, at the end of 2013, smartphone penetration is now above 80%. This is one of the highest penetration rates in the developed world.
More interestingly, from a mobile internet/data usage perspective, smartphone penetration is the highest in the 16-39 age group, with over 90% of this demographic, which I recently left, owning a smartphone.
Mobile internet usage requires the use of a smartphone rather than a traditional mobile phone, so it is the level of smartphone penetration that is relevant rather than the number of SIM cards in active service.
It’s also worth noting that Neilson estimates that this calendar year, globally, mobile internet usage will overtake desktop internet. Obviously, Krudd didn’t read that report when he decided to spend $70 billion on the NBN.
Part of this will be driven by companies like Microsoft offering operating systems like Office for tablets.
A need not a want
My argument remains that smartphones are a consumer staple, not a consumer cyclical. I also believe demand for mobile data will grow exponentially and drive Telecommunications sector revenue growth.
Telstra has the 4G network advantage in Australia and remains my large cap way of playing the structural growth in mobile data. Telstra remains in an earnings and dividend upgrade cycle.
In fact, I suspect most people who read this note today read it on a smartphone using the Telstra 4G network.
Interestingly though, I remain in the minority recommending Telstra shares. However that has been the case for the last three years.
As of yesterday, there are five buy recommendations, nine hold recommendations and five sell recommendations on Telstra. The median 12-month price target of those analysts is $5.08, i.e. most of them think it’s going nowhere. Again, this has been the case for a few years, as the table below of consensus price target (yellow line) and share price (white line) confirms. The green/grey/red shading represents buy/hold/sell recommendations.
Click here [1] to enlarge image.
The track or the trains
The aspect that amazes me is the same tech/telco analysts have universal buy recommendations over Australian internet-based business models (REA Group, Domino’s Pizza, Seek, Carsales.com.au, etc.) which are heavily reliant on Telstra’s 4G network to carry their product and grow their business, yet most of the analysts are neutral to negative on Telstra. To me, that’s like recommending the trains and not the train track. Sure, the trains are moving at a faster pace than Telstra right now, in terms of top-line revenue growth and efficiency (ROE), but the P/E differential already strongly reflects that fact.
It’s also worth remembering Telstra owns 65% of US Listed Autohome (ATHM US$4.2 billion market cap), which translates to a value of 22c per Telstra share. ATHM is twice the size of Carsales.com and you could argue that 22c of value is not reflected at all in Telstra’s share price.
On Bloomberg consensus data for the current year, Telstra trades on 15.2x earnings. REA Group is on 49x, Seek 18.7x, Domino’s 48x, and Carsales.com.au 28x.
I am certainly not a guy who thinks all P/E’s should be equal. Far from it, but I just think we have got to the point where the trains are a bit ambitiously priced versus the track that carries them and I’d rather own the track (TLS).
That doesn’t mean I foresee some collapse/tech wreck 2 in the share prices of highly priced tech growth stocks. I think we could see a near-term trading/valuation correction after the huge run they have had and money being rotated to Telstra.
To me, Telstra gives you leverage to many of the same mobile data themes at a significant P/E discount and significant fully-franked dividend yield advantage, a dividend that is now advancing in absolute terms after eight years of stagnation.
Call it train and track or hare and tortoise, but I prefer the tortoise from here.
Dividend plus
I think Telstra lifting the interim dividend from 14c to 14.5c was a major event for the company. We should get another 14.5c or even 15c fully-franked at the 2H FY14 result in August, which means the company is well on the way to paying 30c fully-franked in dividends in FY15.
If you buy Telstra today and hold it for the next 16 months, you should collect a minimum of 44.5c fully franked (14.5c +30c), putting the stock on a prospective 16-month fully-franked yield of 8.7% or 12.5% grossed up. With EPS growth driving that DPS growth, rather than simply a higher payout ratio, I think the downside risk in TLS shares is very limited.
With Telstra nearly 50% owned by Australian mums and dads in their SMSFs, dividend growth is vitally important to the direction of Telstra shares. I simply can’t see the SMSF army abandoning their Telstra shares when the fully franked dividend is rising in absolute terms.
Similarly, it would take a very large rise in domestic cash rates for bank term deposits to compete with Telstra shares as a source of investment income. Again, I don’t see a scenario of aggressive cash rate rises in the near-term.
Telstra management, under CEO David Thodey, has done a great job of taking costs out, which translates relatively modest headline revenue growth into high single-digit EPS and EBITDA growth. First half FY NPAT rose 9.2%, EPS rose 8.7%. There is more cost to take out, and I continue to believe the consensus view is UNDERESTIMATING forward EPS and DPS for Telstra. I think the stock will remain in an upgrade cycle, which is important to my bullish view on the stock.
To conclude, just keep in mind the 20-year chart of Telstra shares below. In tech boom part 1, they got above $9.00 as they were priced as a technology growth stock. I therefore think it is not an ambitious call to stick by my long held price target of $6.00 for Telstra over the next few years. At $6.00 paying a 30c fully franked annual dividend the stock will still yield an attractive 5.00% fully franked.
100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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