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Is the Australian Telecom sector still worth investing in?

Team Veye | 17 Jul 2018

Is the Australian Telecom sector still worth investing in?

The National Broadband Network(NBN) rollout continues to change the dynamics of Australia’s telecommunications industry, with slower revenue growth leading to increasing competition across the sector. And in an environment where even Telstra has recently reduced its dividend and announced plans to layoff 8000 employees over the next three year in a bid to save one billion dollars, is the Australian Telco sector still worth investing in?

While fixed-line telephony traffic and revenue are declining, the mobile broadband market is growing steadily. Fixed-line broadband on the copper network is also declining as fibre and fixed-wireless broadband services become more widely available, through the National Broadband Network (NBN)’s multi-technology architecture, with its emphasis on VDSL with Fibre-to-the-Node (FttN). In time, much of the voice traffic will be data packet via technologies such as Voice over Long-term Evolution (VoLTE).

While mobile subscriber growth rose by 60,000, increasing price competition saw the average revenue per user decline by 3.6% — in excess of the 2.9% fall for the six months to December for Telstra.  The company said it was focusing on costs in a challenging revenue environment, with underlying fixed costs forecast to decline by around 7% in the 2018 financial year (Source – Business Insider).

Mobile subscriber growth is being driven by population increases as well as a rise in the number of people using two or more mobile subscriptions. Very slow growth is predicted over the next five years to 2022 with penetration rates predicted to rise only slightly above projected population increase. Revenue for Mobile Network Operators (MNOs) in recent years has been characterised by the continuing take-up of services based on LTE technology and to the rising proportion of mobile data to overall revenue.

For all operators, price competition combined with a focus on managing their mobile businesses as they adapt to new technologies being brought into play, have led to considerable pressure in recent years.

Vodafone Australia gained market share from Telstra and Optus during the quarter last year, -- a reversal of recent trends -- with Vodafone moving its prepaid lot upwards by 1.2 points for 15.6 percent of the market and its post-paid lot by 1.3 points for 15.7 percent market share.

Vodafone's double data plans on offer with AUD 40 to 50 were the main reasons for this increase in market share for the company. Vodafone is notorious for initiating a price war with local telecom providers worldwide.

Key developments in Australian Telecom Industry:

While fixed-line telephony traffic is declining, the mobile broadband market is growing.

  • The second-tier market continues to grow strongly.
  • Growth in broadband subscribers is expected to continue to slow further into 2018.
  • Most broadband growth will come from the mobile wireless and fibre broadband markets.
  • Consolidation within the broadband market will provide greater reach and scale.
  • SVOD has emerged as the major category of paid online content in Australia.
  • NBN will accelerate this trend.(Source – Business wire)

Given the weak outlook of the telecom sector by experts, it would be wise for the investors to be patient if they have already invested in companies like Telstra in this sector, as recovery may take longer. It appears that the growing competition may result in mergers or acquisition of some small players by big players to have a higher share of the market. Plus introduction of technologies like 5G may also change the dynamics of this industry but obviously that still has a long way to go. So at this stage it would be wise to wait and watch the tide turning before substantial growth can be predicted in this sector.

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