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Why the Telstra (ASX:TLS) share price outlook suddenly improved last week

The Telstra share price has two big tailwinds that drove its outperformance last week.
The post Why the Telstra (ASX:TLS) share price outlook suddenly improved last week appeared first on The Motley Fool Australia. –

The outlook for the Telstra Corporation Ltd (ASX: TLS) share price is looking brighter and it isn’t only because of the $2.8 billion part-sale of its towers business.

While the transaction certainly caught the imagination of the market and prompted some analysts to upgrade their price target on the Telstra share price, there’s another reason to be bullish on Australia’s largest telco.

Its competitor Vodafone removed all promotional discounts on its SIM-only plans last week, according to Goldman Sachs.

Telstra share price the biggest winner

Shareholders liked the news. The TPG Telecom Ltd (ASX: TPG) share price jumped 1.1% last week to $6.22 (TPG merged with Vodafone).

That’s ahead of the 0.3% gain by the S&P/ASX 200 Index (Index:^AXJO), although the Telstra share price is the big winner with a 5.4% surge.

But as I mentioned, Telstra’s surge was partly driven by its large divestment and promise of a $1 billion plus capital return.

Price rises and expanding margins

The move by Vodafone means an effective price increase for Vodafone customers of between $5 and $15 a month, or 13% to 25%.

“These changes have driven Vodafone (and industry) entry level pricing up to A$40 [a month],” said the broker.

“We are pleased with this development, which continues to support our high conviction on quantum of mobile market repair in Australia.”

Conducive competitive environment

The return of a more rational competitive environment is good news for Telstra’s margins. Vodafone is the last of the big three mobile operators to lift prices after Optus implemented price rises of a similar magnitude in May.

Telstra was the first to move and for a while, it looked like the odd one out. It was a calculated gamble that paid off as it could have lost market share if competitors kept their prices low.

Goldman noted that Telstra’s pricing plans offered at JB Hi-Fi Limited (ASX: JBH) was unchanged. This is good news as the broker believes that this was previously seen as a key inhibitor to Vodafone raising pricing.

Telstra share price could be cum-upgrade again

What it also means is that Telstra sees the earnings benefit of higher average revenue per user (ARPU) outweighed the potential lost subscribers.

“These changes support our view that Telstra is set to grow ARPU meaningfully ahead of consensus expectations across FY21-23E,” said Goldman.

“And [Telstra] will also likely introduce further price rises in FY22E (given its premium is now +20% vs. its +35% 3Y average, despite expanding 5G lead).”

The broker is recommending Telstra as a “buy” with a 12-month price target of $4.20 a share. It rates the TPG share price as “neutral” with a 12-month price target of $5.90 a share.

The post Why the Telstra (ASX:TLS) share price outlook suddenly improved last week appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of Telstra Corporation Ltd and TPG Telecom Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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