jpm equity research

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Asia Pacific Equity Research23 April 2015

Telstra CorporationNeutralTLS.AX, TLS AU

Investor day- CY15E Mobile competition increasing, Impacting ARPU more than subscribers

Price: A$6.26

Price Target: A$5.38

Australia

Telecommunications

Jarrod McDonald AC

(61-2) 9003-8604

[email protected]

Bloomberg JPMA MCDONALD <GO>

J.P. Morgan Securities Australia Limited

Thomas Beadle

(61-2) 9003-8603

[email protected]

J.P. Morgan Securities Australia Limited

James R. Sullivan, CFA

(65) 6882-2374

[email protected]

J.P. Morgan Securities Singapore Private Limited

YTD 1m 3m 12m

Abs 4.9% -1.4% -1.3% 21.1%Rel -3.1% 0.7% -9.0% 14.9%

Telstra Corporation Limited (Reuters: TLS.AX, Bloomberg: TLS AU)

Year-end Jun (A$) FY13A FY14A FY15E FY16E FY17ERevenue (A$ mn) 24,776 26,296 26,240 28,405 29,584EBITDA (A$ mn) 10,295 10,684 10,708 11,455 12,244Net Profit (A$ mn) 3,739 4,275 4,136 4,647 5,284EPS (A$) 0.30 0.34 0.34 0.38 0.46P/E (x) 20.8 18.2 18.6 16.3 13.5EV/EBITDA (x) 9.0 8.4 8.5 8.0 7.4DPS (A$) 0.28 0.30 0.30 0.30 0.30Dividend Yield 4.5% 4.7% 4.8% 4.8% 4.8%Normalised EPS (A$) 0.30 0.33 0.34 0.38 0.46Normalised EPS Growth 4.4% 11.4% 1.1% 14.4% 20.9%Normalised PE 21.0 18.8 18.6 16.3 13.5Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 12,226Market Cap (A$ mn) 76,532.63Market Cap ($ mn) 59,350.62Price (A$) 6.26Date Of Price 23 Apr 15Free Float(%) -3M - Avg daily vol (mn) 32.253M - Avg daily val (A$ mn) 205.263M - Avg daily val ($ mn) 159.2ASX100 4874.00Exchange Rate 0.78Price Target End Date 31-Dec-15Price Target (A$) 5.38

See page 9 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Price Performance

TLS.AX share price (A$)

ASX100 (rebased)

TLS did not provide a trading update at today’s investor day, with no new material data points forthcoming; we see the significance of today’s presentation to the stock price therefore negligible. The main operational comments noted the increased competition in the CY15E mobile market. While mobile subscriber trends are not ‘abnormal’, we expect some impact on 2H15E Mobile ARPU given the increasing competitive landscape and changing mix. We are Neutral TLS, with a $5.38 PT.

CY15E Mobile Market, increasing competition - While TLS acknowledged the increased industry competition in CY15E and increased churn (1H15E 12.0%), TLS stated they are not seeing anything 'abnormal' on subscriber numbers vs recent trends. We expect some impact on 2H15E Mobile ARPU given the increased competitive environment and the lower margins of additional services (i.e new phone feeling) vs the core business. TLS’s guided to no change in MobileEBITDA margins in the high 30%’s (JPMe FY15E 41%, FY16E 40%).

Network – With consumers valuing network quality, TLS is focused on using technology to scale the network economically, with the increased consumer interaction (i.e. High bandwidth video)/number of devices and the internet of things materially changing the future network load. TLS see the future in voice/video calling and home automation/control.

Emerging Consumer trends – TLS highlighted a number of customer trends/expectations: 1) Video consumption - with a focus on Video quality/load time, and the customer experience 2) Upper end tablets‘Hybrids’ can replace PC’s/Laptops 3) On Demand Entertainment – at home & on the go, ability to take entertainment mobile & 4) Smart Home devices are becoming smarter, with the home eco-system coming together, TLS’s focus is on Security/Automation & Energy.

Maintain Neutral rating - While yield support may continue to see the stock trade around current levels, over the medium term we see the stock drifting closer to our valuation. We are Neutral TLS, with a $5.38 PT.

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Jarrod McDonald(61-2) [email protected]

Mobile in CY15E - competition intensifying, potentially impacting 2H15E ARPU

The main operational comments by Warwick Bray, Executive Director - Mobile & Wireline, noted the increased competition in the CY15E mobile market. TLS stated they are not seeing anything 'abnormal' on subscriber numbers vs recent trends. We expect some impact on 2H15E Mobile ARPU (1H15E +2.8%), given the increased competitive environment and the lower margins of additional services (i.e new phone feeling) vs the core business.

TLS re-confirmed the margin outlook in Mobile (i.e. high 30% range), with margins to be impacted by a range of factors going forward, including churn, re-contracting, and the introduction of lower-margin value-added services which are incremental to existing revenues. We forecast Telstra’s margin to hit 41% in FY15E, before falling to 40% in FY16E and medium term mobile margins of c.38%.

The comments around the competitive environment follow the significant turnaround in the mobile market in 1H15, with market revenue growth of +6.5% (TLS +9.6%), reversing recent trends which were impacted by declines in MBB SIOs at the market level, a lower MTR and lower equipment revenues. 469k SIOs were added in the half, which was the highest rate of growth since the Jun-12 half. Telstra’s share of SIOs and revenue continued to grow, although we note Vodafone’s return to net SIO growth in 1H15, which we think may be partly responsible for higher level of churn by TLS in the half. We also note comments today around recent competitive developments potentially indicates continued net SIO growth at Vodafone.

Figure 1: Mobile revenues growth by half (A$m)

Source: J.P. Morgan estimates, Company data.

Figure 2: Mobile revenues by half (A$m)


Figure 3: Total Mobile Market SIO growth by half (‘000s)


Figure 4: Mobile SIO growth in the Dec-14 half (‘000s, incl. wholesale)


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Telstra Market

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3,059 2,986 3,124 2,886 2,933 2,692 2,746 2,6192,927

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Figure 5: Share of mobile SIOs


1H15E Mobile Market Review

1H15 Mobile Sub Adds – Telstra added c.366K net additional subscribers in the half (JPMe +326K), while Optus lost 12K, with a +100K increase in mobile handset SIOs more than offset by the 112K decline in mobile broadband SIOs. Vodafone’s SIOs grew by +91k, the first half of growth since the Dec-10 half. We note the slight uptick in churn to 12.0% (1H14: 10.2%), with TLS highlighting a more competitive market environment.

Figure 6: Share shift to Telstra, half-on-halfPercentage points

Source: Companies

Figure 7: TLS Mobile Net Adds1

1. Excludes wholesale. Source: Telstra, J.P. Morgan

41.1% 43.0% 44.7% 45.9% 47.3% 49.5% 52.2% 52.9% 53.3%

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Network differentiation and innovation

The other key focus of Telstra’s investor day was network differentiation and innovation. TLS identified this as a critical factor driving the success of Telstra’s consumer businesses.

Management noted that speed and reliability are the biggest drivers of consumer advocacy in mobile, which also enables TLS to position its mobile product at a premium pricing vs competitors. Telstra outlined four key network differentiators of its mobile business: network breadth (area covered); more reliable speeds; fewer dead spots; and fewer dropouts. These differentiators are a result of significant continued investment in its mobile network, we also note TLS continues to increase its 4G footprint (94% population coverage by June, currently 90%), as well as deploy new technologies such as Voice over LTE (VoLTE).

We note Telstra’s recent increases to its mobile plans in March, with data allowances approximately doubling. We believe that Telstra’s continued investment in its network will allow it to maintain its share at its current high level and continue to position its offering at a premium to its competitors.

In Fixed it was a similar story, with TLS highlighting the importance of building networks to handle emerging trends, consumer trends. Trends highlighted by Telstra included:

Video consumption, with a focus on Video quality/load time, and the customer experience;

Upper end tablets ‘Hybrids’ can replace PC’s and laptops;

On Demand Entertainment – At home and on the go, ability to take up where you left off;

Smart Home devices are becoming smart, with the home eco-system coming together, TLS is focusing on Security/Automation and Energy; and

Consumers are becoming increasing savvy, with higher customer service expectations.

Figure 8: Telstra's fixed network investment

Source: Telstra

5



TLS Earnings Forecasts

Table 1: TLS earnings forecasts

FY14 FY15 % pcp FY16 % pcp FY17 % chg % pcpActual Estimate Estimate Estimate

Total Income 26,296 26,240 -0.2% 28,405 8.3% 29,584 6.4% 4.1%

Reported EBITDA 11,135 10,711 -3.8% 11,455 6.9% 12,244 3.1% 6.9%Underlying EBITDA 10,684 10,708 0.2% 11,455 7.0% 12,244 3.1% 6.9%D&A -3,950 -3,976 0.6% -3,934 -1.0% -3,808 2.0% -3.2%Reported EBIT 7,185 6,735 -6.3% 7,521 11.7% 8,436 3.6% 12.2%Net Interest Expense -957 -722 -24.6% -771 6.8% -771 -0.5% -0.1%Tax -1,679 -1,804 7.4% -2,025 12.2% -2,299 4.0% 13.6%Minorities -70 -74 5.0% -77 5.0% -81 0.0% 5.0%Reported NPAT 4,479 4,136 -7.7% 4,647 12.4% 5,284 4.1% 13.7%Normalised NPAT 4,140 4,134 -0.1% 4,647 12.4% 5,284 4.1% 13.7%Reported EPS 36.0 33.6 -6.5% 38.5 14.4% 46.5 4.1% 20.9%Normalised EPS 33.3 33.6 1.1% 38.5 14.4% 46.5 4.1% 20.9%DPS 29.5 30.0 1.7% 30.0 0.0% 30.0 0.0% 0.0%


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Investment Thesis, Valuation and Risks

Telstra Corporation (Neutral; Price Target: A$5.38)

Investment Thesis

We have a Neutral rating on Telstra. The stock trades above our valuation (see below) but our forecasts do incorporate a significant fade in mobile margins and take a conservative view of retail fixed margins in an NBN world (16%). Meanwhile, dividend support for the stock is strong, and there is a legitimate debate about how hard the landing will be for its margins in the longer term. In this context, we do not think that valuation is a strong enough catalyst for a de-rating.

Equally, we struggle to see much upside. We think the stock is on a challenging multiple (PE >19x FY15 Bloomberg consensus) given that returns in the key businesses are already high and revenue growth is slow. Allowance should be made for the lower-risk status of the NBN payments – TLS is effectively a stock stapled to a bond – but these payments are there for a reason, which is that the business is rebased from incumbent to reseller.

Valuation

Our Dec-15 price target is $5.38, based on a discounted cash flow valuation which uses a WACC of 7.2% (market risk premium 5.0%, risk free rate 4.5%) for the underlying business and a 4.5% discount rate for payments from NBN Co.

Table 2: TLS valuation summary

TLS Valuation Dec-15

Enterprise value - Underlying business 53,790NPV Cash Flows - NBN Payments 23,685TLS Enterprise value 77,476Net Debt 11,437Minorities 241Equity value 65,797Number of shares 12,226Value per share 5.38

AssumptionsWACC - Underlying business 7.2%Discount rate applied to NBN Payments 4.5%

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Upside and downside risks to our rating and price target include:

1. An acceleration in retail fixed line loss;

2. More active competition in the mobile market;

3. NBN driven margin compression is more or less dramatic than we expect;

4. A change in government policy;

5. Larger/sooner-than-expected capital management programme.

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Telstra Corporation Relative recommendation: NeutralA$ in millions, year end JunProfit And Loss FY13 FY14 FY15E FY16E FY17E Valuation Summary A$m A$psRevenue 24,776 26,296 26,240 28,405 29,584 Current mkt capitalisation 76,532.63 6.26Revenue growth (2.8%) 6.1% (0.2%) 8.3% 4.1%COGS - - - - - Price Target 5.38Operating Expenses (14,434) (15,567) (15,487) (16,906) (17,295) Capital growth to price target (14.1%)EBITDA 10,295 10,684 10,708 11,455 12,244EBITDA growth (0.7%) 3.8% 0.2% 7.0% 6.9% Trading Multiples FY13 FY14 FY15E FY16E FY17EEBITDA margin 41.6% 40.6% 40.8% 40.3% 41.4% PE Pre-abnormals 21.0 18.8 18.6 16.3 13.5Amortisation (1,013) (1,054) (1,012) (1,055) (1,008) PE Reported 20.8 18.2 18.6 16.3 13.5Depreciation (3,061) (2,896) (2,963) (2,879) (2,800) EV/EBITDA 9.0 8.4 8.5 8.0 7.4EBIT 6,221 6,734 6,732 7,521 8,436 EV/EBIT 14.8 13.3 13.5 12.2 10.8Other Income - - - - -Other Expenses Key Ratios FY13 FY14 FY15E FY16E FY17ENet Interest (825) (957) (722) (771) (771) Dividend Yield 4.5% 4.7% 4.8% 4.8% 4.8%Pre-Tax Profit 5,396 5,777 6,010 6,749 7,665 Franking 100.0% 100.0% 100.0% 100.0% 100.0%Tax (1,629) (1,567) (1,803) (2,025) (2,299) Return on Assets (%) 9.5% 10.6% 11.0% 13.0% 14.9%Tax Rate 30.2% 27.1% 30.0% 30.0% 30.0% Return on Equity (%) 30.8% 31.3% 30.4% 35.6% 41.5%Minorities (52) (70) (74) (77) (81) ROIC (%) 16.0% 17.1% 16.9% 20.3% 23.1%Abnormals (post tax) 24 135 2 0 0Reported NPAT 3,739 4,275 4,136 4,647 5,284 Leverage FY13 FY14 FY15E FY16E FY17E

Gearing (Net Debt / Equity) 102.1% 75.4% 88.2% 94.2% 91.5%Normalised NPAT 3,715 4,140 4,134 4,647 5,284 Gearing (ND / (ND + E)) 50.5% 43.0% 46.9% 48.5% 47.8%Growth 4.7% 11.4% (0.1%) 12.4% 13.7% Net Debt / EBITDA 127.7% 98.5% 112.0% 107.1% 97.7%

EBIT Interest Cover (x) 7.5 7.0 9.3 9.8 10.9End of Period Shares 12,443 12,443 12,226 11,580 11,149EFPOWA 12,444 12,445 12,296 12,082 11,364 Balance Sheet FY13 FY14 FY15E FY16E FY17E

Cash 2,479 5,527 1,052 785 1,083Reported EPS ($) 0.30 0.34 0.34 0.38 0.46 Receivables 4,557 4,172 4,224 4,333 4,310Normalised EPS ($) 0.30 0.33 0.34 0.38 0.46 Investments - - - - -Growth 4.4% 11.4% 1.1% 14.4% 20.9% Inventories 431 362 346 355 353

Other Current Assets 436 377 377 377 377DPS ($) 0.28 0.30 0.30 0.30 0.30 Total Current Assets 7,903 10,438 5,999 5,850 6,123Growth 0.0% 5.4% 1.7% 0.0% 0.0% Net PPE 20,326 19,842 19,945 19,878 19,790

Total Intangibles 8,202 6,382 7,400 7,138 6,990DPS/EPS payout 93.2% 85.9% 89.2% 78.0% 64.5% Other Non Current Assets 2,096 2,698 2,698 2,698 2,698

Total Non Current Assets 30,624 28,922 30,043 29,714 29,478Cash Flow Statement FY13 FY14 FY15E FY16E FY17E Total Assets 38,527 39,360 36,043 35,565 35,602Net Profit for Cashflow 3,739 4,275 4,136 4,647 5,284 Creditors 4,241 3,834 3,878 3,978 3,957Depreciation & Amortisation 4,074 3,950 3,976 3,934 3,808 Current Borrowings 751 2,277 2,277 2,277 2,277Non Cash Items 574 (224) 0 0 0 Current Tax Provisions - - - - -Working Capital Changes (883) (524) 7 (18) 4 Other Current Provisions 918 932 932 932 932Other Operating Cashflows 210 505 240 243 247 Other Current Liabilities 1,612 1,641 1,641 1,641 1,641Cashflow from Operating Activities 7,714 7,982 8,358 8,807 9,343 Total Current Liabilities 7,522 8,684 8,728 8,828 8,807

Non Current Creditors - - - - -Capex (4,509) (3,762) (4,841) (3,605) (3,572) Non Current Borrowings 14,313 13,547 10,547 10,547 10,547Net Acquisitions 730 2,235 (256) 0 0 Deferred Tax Liabilities 1,330 1,286 1,286 1,286 1,286Other Investing cashflows 52 81 0 0 0 Other Non Current Provisions 276 261 261 261 261Investing Cash Flow (3,727) (1,446) (5,097) (3,605) (3,572) Other Non Current Liabilities 2,169 1,622 1,622 1,622 1,622

Total Non Current Liabilities 18,130 16,716 13,716 13,716 13,716Inc/(Dec) in Borrowings (1,968) 185 (3,000) 0 0 Total Liabilities 25,652 25,400 22,444 22,544 22,523Equity Issued 0 0 (1,004) (1,800) (2,000) Equity 5,711 5,719 4,715 2,915 915Dividends Paid (3,480) (3,545) (3,733) (3,668) (3,474) Other Equity 0 0 (0) 0 0Other Financing Cashflows (41) (123) 0 0 0 Reserves (619) (228) (228) (228) (228)Financing Cash Flow (5,489) (3,483) (7,737) (5,468) (5,474) Retained Profits 7,519 8,331 8,900 10,046 12,022

Outside Equity Interests 264 138 212 289 370Net Cash Flow (1,502) 3,053 (4,475) (266) 297 Total Shareholders Equity 12,875 13,960 13,598 13,021 13,079

Net Debt 12,585 10,297 11,772 12,039 11,741

Source: Company reports and J.P. Morgan estimates.

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JPM Q-ProfileTelstra Corporation Limited (AUSTRALIA / Telecommunication Services)As Of: 16-Apr-2015 [email protected]

Local Share Price Current: 6.19 12 Mth Forward EPS Current: 0.36

PE (1Yr Forward) Current: 17.0x P/E Relative to S&P/ASX 200 Index Current: 1.48

Earnings Yield (& Local Bond Yield) Current: 6% Dividend Yield (Trailing) Current: 4.75

ROE (Trailing) Current: 35.31 Price/Book (Value) Current: 5.7x

SummaryTelstra Corporation Limited 57546.25 As Of:AUSTRALIA 112.9812 TICKER TLS AU Local Price: 6.19

Telecommunication Services Diversified Telecommunication EPS: 0.36

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 17.01x 9.18 23.15 14.30 14.17 19.60 8.74 -46% 36% -16% -17%

P/BV (Trailing) 5.67 2.57 9.53 4.18 4.38 6.66 2.09 -55% 68% -26% -23%

Dividend Yield (Trailing) 4.75x 2.53 10.78 6.14 6.56 10.74 2.37 -47% 127% 29% 38%

ROE (Trailing) 35.31 21.17 35.31 29.79 29.06 36.39 21.72 -40% 0% -16% -18%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in Telstra Corporation.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Telstra Corporation within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Telstra Corporation.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Telstra Corporation.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Telstra Corporation.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Telstra Corporation.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Telstra Corporation.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Telstra Corporation.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Telstra Corporation.

“J.P. Morgan Securities LLC (“J.P. Morgan”) is acting as Joint Bookrunner for Telstra Corporation Limited’s ("Telstra") 144A / Reg S offering as announced on 30th March 2015. J.P. Morgan will be receiving fees in relation to the offering. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for Telstra or its affiliates and may have other interests in or relationships with Telstra or its affiliates, and receive fees, commissions or other compensation in such capacities. This research report and the information herein is not intended to serve as an endorsement of the possible transaction or result in procurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.”

Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

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Date Rating Share Price (A$)

Price Target (A$)

18-Jan-07 UW 4.42 3.92

15-Feb-07 UW 4.37 3.97

07-Jun-07 UW 4.81 4.07

19-Aug-07 N 4.24 4.07

10-Oct-07 N 4.46 4.39

01-Nov-07 N 4.71 4.70

21-Feb-08 N 4.69 4.78

21-May-08 UW 4.86 4.23

15-Dec-08 UW 4.13 3.55

13-Jan-09 UW 3.74 3.18

26-Feb-09 UW 3.77 2.99

10-Mar-09 UW 3.14 2.92

07-Apr-09 UW 3.21 3.21

15-Jun-09 UW 3.33 3.10

14-Aug-09 N 3.60 3.39

15-Dec-09 N 3.50 3.41

18-Dec-09 N 3.43 3.31

12-Feb-10 N 3.12 3.29

18-Mar-10 N 3.13 3.33

21-Jun-10 N 3.23 3.48

28-Jun-10 N 3.30 3.42

13-Aug-10 N 2.94 3.06

23-Nov-10 OW 2.65 3.08

11-Feb-11 OW 2.88 3.13

24-Jun-11 OW 3.03 3.15

12-Aug-11 OW 2.99 3.26

18-Aug-11 N 3.16 3.26

18-Nov-11 N 3.19 3.21

03-Aug-12 N 4.02 3.64

09-Aug-12 N 3.97 3.75

31-Oct-12 N 4.11 3.86

13-Dec-12 N 4.26 3.97

30-Jan-13 N 4.59 4.14

07-Feb-13 N 4.64 4.24

10-Apr-13 N 4.58 4.27

23-Jul-13 N 4.96 4.68

08-Aug-13 N 5.13 4.76

20-Dec-13 N 5.20 4.80

28-Jan-14 N 5.12 4.95

13-Feb-14 N 5.11 5.00

25-Jul-14 N 5.48 5.09

14-Aug-14 N 5.44 5.11

23-Oct-14 N 5.46 5.12

12-Feb-15 N 6.45 5.38

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy

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Price(A$)

Oct06

Apr08

Oct09

Apr11

Oct12

Apr14

Telstra Corporation (TLS.AX, TLS AU) Price Chart

N A$4.39 UW A$2.99UW A$3.1N A$3.29N A$3.42 N A$3.26 N A$3.86N A$4.24 N A$5 N A$5.12

UW A$3.97N A$4.07UW A$4.23UW A$3.18UW A$3.21N A$3.31N A$3.48OW A$3.13OW A$3.26 N A$3.75N A$4.14N A$4.76N A$4.95N A$5.11

UW A$3.92UW A$4.07N A$4.7N A$4.78UW A$3.55UW A$2.92N A$3.39N A$3.41N A$3.33N A$3.06OW A$3.08OW A$3.15N A$3.21N A$3.64N A$3.97N A$4.27N A$4.68N A$4.8N A$5.09N A$5.38

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jan 18, 2007.

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reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: McDonald, Jarrod: APN News & Media (APN.AX), Fairfax Media Limited (FXJ.AX), News Corporation (NWS.AX), Nine Entertainment Co. Holdings (NEC.AX), Prime Media Group Limited (PRT.AX), REA Group Ltd (REA.AX), SEEK Limited (SEK.AX), Seven West Media Limited (SWM.AX), Sky Network Television Limited (SKT.NZ), Southern Cross Media Group (SXL.AX), TPG Telecom Ltd (TPM.AX), Telstra Corporation (TLS.AX), Ten Network Holdings (TEN.AX), carsales.com Ltd (CAR.AX), iiNet (IIN.AX)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2015

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 43% 44% 13%IB clients* 55% 49% 37%

JPMS Equity Research Coverage 44% 48% 9%IB clients* 75% 68% 54%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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"Other Disclosures" last revised March 28, 2015.

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