Why J.P. Morgan sees more upside for the Telstra share price

Telstra share price: the thesis & situation

Telstra’s dominance in the Australian telecommunications market, its network advantage and strong brand presence all stand as key positives for the blue-chip telco.

That’s not to say analysts are oblivious to the headwinds facing the sector at large: the NBN in particular has put pressure on Telstra’s margins and the potential for disruption in Australia’s mobile market remains.

Indeed, the NBN’s rollout of Australia’s national broadband network has proven controversial among some in corporate Australia. It was likely the margin pressure noted above that contributed to recent comments from Telstra’s chairman – John Mullen – that:

‘It seems inequitable that the NBN can now move outside its mandate and sell directly to our customers, but RSPs have to stay within their mandate and cannot sell to the NBN’s own protected market in return, due to regulations which prevent retail providers investing in fixed line infrastructure to provide consumer services.’

Broad risks aside – given Australia’s currently tepid economic growth, Telstra’s continued dominance as a telecommunications power-house and without another significant player in the mobile market – the US$432bn investment bank, J.P. Morgan, remains bullish on Telstra’s prospects.

The telco’s market leadership in the 5G space as well as an attractive valuation is also appealing to the investment bank.

This rollout of 5G is anticipated to be the next driver of growth for the company – says Telstra’s CEO.

In line with this and as part of a recent research report, J.P. Morgan’s has remained overweight the blue-chip telco – continuing to see upside potential – with a June CY20 share price target of $4.25.

At Telstra’s (ASX: TLS) last traded share price on Thursday of $3.69, this price target would imply potential upside of around 15% – not including dividends.

Telstra share price: the risks

J.P. Morgan’s risk assessment for Telstra is an intriguing one. Taking a slight broker detour, it is Morgan Stanley for example, that believes the near-term worst case for the Telstra share price would be for the TPG-Vodafone merger – currently being decided over by Justice John Middleton – to be approved.

J.P. Morgan sees it the other way around: in fact, J.P. analysts believe that the TPG-Vodafone merger being approved actually ranks as a positive for Telstra. According to the investment bank this is because it means there would no longer be the potential for another aggressive player in Australia's mobile market.

Interestingly and on the other hand, the investment bank does note that the approval of the TPG-Vodafone merger would create a more fierce combined-competitor, with a stronger balance sheet.

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