Telstra (ASX: TLS) shares have plummeted to their lowest level since November 2011 and many investors are now facing a considerable loss on their shares. For those yet to invest, the question is whether the shares represent a good value. Experts views diverge.

Memories of the T1 float are re-emerging for some investors in the company, when Telstra was sold off by the government at $3.30 a share. Telstra shares are now below that level, around $3.10.

Intense broadband and mobile competition, the roll out of the National Broadband Network (NBN) and emerging competition from TPG, which is rolling out its own 4G mobile network, have seen investors sell down the big telco’s shares in anticipation of an erosion of its dominant market share.

However, Brian Han, senior equity analyst, Morningstar Australia, believes Telstra has been oversold.

“I think Telstra will maintain its dominant market share, though we do concede that it may give up some market share to TPG. But we think TPG’s mobile network will be inferior to Telstra’s and we expect it will be geared towards the budget consumer, so Vodaphone has the most to lose give its skew to that type of customer.

“We don’t think TPG will be able to make in-roads into Telstra’s premium-end and business customers who value the national coverage and quality of its network.”

Han says Telstra retains a strong financial position and the stock represents good value. He has a target value of $4.60, well above its current level. The company still enjoys a large market share compared to other telcos, with about 50 per cent of the broadband market, just under 50 per cent of the mobile market, and in corporate telecommunications, they hold about 50 per cent of the market too.

Another factor weighing on Telstra is that interest rates are on the rise, at least in the US but eventually in Australia. That has taken some shine off high income-yielding shares like Telstra, but its yield remains attractive, says Han.

“The dividend yield on Telstra is currently 7 per cent fully franked, or 10 per cent grossed up, so that’s a pretty good yield. We think the 22 cent dividend per share is sustainable given the outlook we have on Telstra’s earnings,” he said.

“We retain our earnings estimates and continue to see Telstra shares as attractive relative to our $4.60 fair value estimate. While management's reiteration of full-year $10.1 to $10.6 billion Earnings before interest, tax, depreciation and amortization (EBITDA) guidance was not a surprise (we are at $10.4 billion). That should allay fears of some investors mired in maximum pessimism,” says Han.

But over the short to medium term, the NBN roll out will hurt Telstra. “Competition is as intense as ever in the mobile and broadband markets. Telstra is now a reseller in the fixed-line space and the NBN is charging a lot for access, so Telstra has the most to lose. The NBN roll out will eventually cost it $3 billion of earnings before interest, tax, depreciation and amortisation within the next four to five years,” says Han. But he doesn’t expect the gap to climb above that.

Clime Asset Management, however, says there is significant risk that the $3 billion earnings hole estimate is optimistic.

“Not only is Telstra contending with the direct costs of the NBN, but also stands to lose $1.3 billion annually in wholesale revenues to the likes of TPG, Optus and Vocus. This is to say nothing of NBN connection costs, margin compression in fixed line services and any future restructuring costs. Looking out further than that, the outlook may still grow more challenging, with TPG investing heavily into building a viable fourth competitor in the mobile market.

“Once again, where Telstra once enjoyed a far superior network with better coverage and service, its position has been steadily eroded by competitors upgrading their own networks,” says Clime.

However, like Han, Clime believes that “the sustainability of this dividend remains assured, given the conservative, recently-revised payout ratios and Telstra's strong financial position.”

On another positive note, stock broker Morgans believes that Telstra is the best placed to roll out the 5G mobile spectrum given its substantial ownership of key ingredients. The broker has a $4.12 target on the stock and a Buy call.

“The key ingredients for 5G are fibre (for routing last mile wireless traffic onto large central backhaul cables and directing traffic towards its destination), towers (for coverage and volume), customer scale (to better share the fixed cost base) and spectrum (for the last mile).

“Telstra has the most fibre, the most towers, and the most customers (35 per cent more than average). Optus owns the most 5G spectrum but Australian standards are still being devised. Once Australian 5G standards are set the spectrum will auctioned off starting mid-2018 and Telstra appears best funded to bid. It is around two years before 5G will become materially commercial and we think Telstra is best placed for this step change,” says Morgans.

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Nicki Bourlioufas is a contributor for Morningstar Australia.

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