Analyst insights: Our top telecom pick on the ASX

Key points:

• In telecom, mobile pricing is likely to step up another level for the remainder of 2023. It should distinguish the sector despite rising expenses, a weakening economy, and escalating living costs from a general lack of pricing power elsewhere.
• Improving mobile pricing after four-plus years of intense competition and discounting is a likely key tailwind for all telecom operators, especially given the importance of mobile earnings
• Shares in narrow-moat TPG Telecom (TPG) trade at an attractive discount to our AUD 7.40 fair value estimate and screen as the most attractive under our Australian telecom coverage.
• TPG Telecom has added $5 per month to post-paid plans since the start of the year. Telstra (TLS) is due to lift its mobile prices in July by Consumer Price Index. Optus is likely to follow, given the pressure from parent Singtel (Z74) to improve earnings and extract an adequate return on the 5G rollout.

Morningstar's outlook report on the telecom sector is available to Investor subscribers here. 

Transcript:

Brian Han: So in the telecom sector, I think the key takeaway is that mobile price increases are continuing to come through.

So since June 2020, on average, mobile prices have gone up about 6%. Now in the 4.5 years up to June 2020, we had intense competition and really aggressive discounting. So we got some catch up to do.

Now after all those mobile prices since 2020, Telstra will increase its mobile prices by further CPI this year, whatever that CPI might be. Vodafone, TPG's Vodafone will also increase its postpaid mobile prices by about $5 per month imminently. Now that is music to Optus' ears because it will then also allow it to increase prices despite the cyber hacking incident last year.

So we have this situation where mobile price increases are coming through at a time when the sector is transitioning to 5G and so those are the key tailwinds for the telecom sector.

Now before people moan about the mobile price increases. We must remember they've had a good for about 4.5 years, up to about 2020, and when you think about a consumer spending $40 to $50 a month on mobile, it's really quite a drop in the ocean considering, how our lives are revolving around these devices? And on top of that, these mobile operators, they do need to get a commercial return on all the money that they're spending rolling out 5G infrastructure.

So that's the tailwind for the telecom sector. And within that sector, TPG Telecom is our best pick, trading at a 30% discount to our $7.40 valuation.