Why we think Telstra investors need to watch who takes a stake in Optus

Research evidence excerpt

Why we think Telstra investors need to watch who takes a stake in Optus

IdeaMExhibit 20: What happens when telco industry competition changes? One example is

Telstra's P/E multiple de-rating from 18x in 2016 to 10x in 2018 following TPG's entry.

Source: Morgan Stanley Research Estimates

1) Bull case scenario for TLS/TPG – new investor supports pricing, lifts

returns, and reduces capital intensity across the industry

We see an infrastructure-type investor, focused on stable and predictable long-term

returns, as a positive for TLS. In this scenario, aggressive price discounting to gain market

share is unlikely, and we would expect a supportive pricing environment. This outcome

would be modestly positive for TLS shares.

In our bull case, the three incumbent MNOs could also act to reduce spectrum renewal

risk and future acquisition costs. We assume no participant materially expands beyond

current spectrum holdings, supporting a more disciplined structure. This environment

would enable predictable and recurring mobile price increases, driving higher ARPUs and

benefiting all industry participants.

There may also be scope for greater infrastructure sharing across the three MNOs in a

mutually beneficial manner. While this idea frequently arises in industry discussions and

channel checks, execution has been limited to date. The recent TPG–Optus MOCN

agreement provides one example of potential progress in this area.

2) Bear case scenario for TLS/TPG – an aggressive disruptor emerges

and ultimately takes control of Optus

Our OW thesis on TLS reflects its position as a high-quality defensive, supported by

market leadership, strong pricing power, a robust balance sheet, and ongoing mobile

ARPU growth of ~3–4% p.a. This underpins mid-single-digit EBITDA growth and mid- to